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Financial Conditions Are Loosest Since 1994

17 Nov 2017 5:02 am

By Ben Eisen

The Federal Reserve keeps lifting rates, but financial conditions keep getting looser.

A measure of how easily money and credit flow the through the economy via financial markets is at its loosest since January 1994, according to the latest data from the Federal Reserve Bank of Chicago. The National Financial Conditions Index was most recently at minus-0.93, meaning financial conditions are almost a full standard deviation looser than average.

The latest numbers in the Chicago Fed index may be revised in the coming weeks based on future data, but a broader trend toward looser conditions has been ongoing for much of the last 18 months. The measure tracks a wide variety of market factors, such as borrowing costs, stock market volatility, and the level of the U.S. dollar.

Policymakers and investors alike keep a close eye on financial conditions for an indication of the effect monetary policy is having on the broader economy. When markets sold off early last year after the Fed's first rate increase of this cycle, for example, financial conditions quickly became more restrictive. Fed Chairwoman Janet Yellen mentioned it at the time, and eventually the Fed slashed its expectations for how quickly it would raise rates.

Now, the opposite is happening. The Fed is withdrawing its easy-money policy by lifting rates, actions that typically lift borrowing costs and tighten financial conditions. But conditions are loosening, and it's showing across the various tools used to measure it. The Goldman Sachs Financial Conditions Index, one of the most widely watched measures, is also currently around multi-year lows.

Markets have absorbed the Fed's tighter monetary policies with a striking amount of ease, in part because of how predictable and well choreographed the central bank policies have been. Stock market volatility has been near record lows, companies are still able to borrow at cheap rates, and the U.S. dollar has weakened sharply this year.

The Chicago Fed's measure is broad, spitting out a reading based on 105 different variables that are lumped into three categories. The bucket that's pulled the index down the most over the last year has been the one that measures credit growth. It fell to minus-0.33 from minus-0.15 in September 2016, indicating conditions are becoming more encouraging of borrowing.

Credit measures such as credit default swap spreads and yield premiums on commercial mortgage-backed securities have recently aided the index's fall, the Chicago Fed's data show.

One caveat: the index doesn't take into account economic data. Adjusting for macroeconomic conditions, the index actually becomes slightly less loose, suggesting the slowly expanding U.S. economy is acting as one restraining factor on financial conditions.

(END) Dow Jones Newswires

November 17, 2017 00:02 ET (05:02 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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