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The stock market's fear gauge soars 17% as aggressive Fed forces investors to 'wake up to screeching hawks'

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lael brainard
Federal Reserve Governor Lael Brainard.Alex Wong/Getty Images
  • The so-called VIX fear gauge for US stocks soared on Wednesday while equities broadly sold off.

  • Nervousness among investors was heightened after hawkish remarks by the Fed's Lael Brainard and Mary Daly.

  • Markets are pricing in expectations for the Fed to raise interest rates by a hefty 50 basis points at upcoming meetings.

The US stock market's so-called "fear gauge" sharply jumped Wednesday as Federal Reserve officials signaled a more aggressive stance against hot inflation than investors had anticipated.

The Cboe volatility index surged as much as 17% to 24.65, the highest level since March 21. That coincided with a slump in tech stocks that drove the Nasdaq Composite down by more than 2% intraday. The renewed nervousness among investors was spurred by hawkish remarks from Fed Governor Lael Brainard and San Francisco Fed President Mary Daly, who are both typically dovish voices.

"The [Federal Open Market] Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted," Brainard said at a speech at the Minneapolis Fed on Tuesday.

The FOMC will start reducing the Fed's balance sheet by a "rapid pace" as soon as its meeting in May and it will continue to tighten monetary policy "methodically through a series of interest rate increases," she added.

Meanwhile, Daly on Tuesday told the Native American Finance Officers Association that high inflation "is as harmful as not having a job" and assured the group the Fed is working on bringing down prices for living expenses, according to a CNBC report. In a Financial Times interview published Sunday, Daly said the case for a rate hike of 50 basis points "has grown," barring a negative surprise between now and Fed's next meeting.

Investors were pricing in ramped-up expectations for the Fed to raise interest rates by a hefty 50 basis points at its meetings in May and June, following up on its hike of 25 basis points in March.

But now, markets are waking up to "screeching hawks," Bespoke Investment Group said late Tuesday in noting the Nasdaq's fall of 2.2% and the small-cap Russell 2000 index's 2.4% drop.

Brainard's remarks suggest she sees the possibility for another 200 basis points in rate increases in 2022, "slightly more aggressive than market pricing and consistent with multiple 50 bps hikes as well as tightening at every meeting," said Bespoke. "[While] that forecast is definitely contingent on inflation staying high, the rhetoric today was consistent with a 50 bps tightening in May.

Minutes from the Fed's meeting in March were due Wednesday afternoon. Last month, the Fed raised rates from a range of 0% to 0.25% and indicated six more rate hikes were in the pipeline.

A chart shows a jump in the VIX index on Wednesday, April 6, 2022
The VIX is leaping.Markets Insider

Read the original article on Business Insider