Friday, May 27, 2022

The Fed has been tightening financial conditions (Chicago Fed ANFCI index)




Financial conditions are tied to the stock market. As stress increases, stocks should decline. Looking at the Chicago Fed Adjusted Financial Conditions Index ANFCI and the SPX over one month shows a strong relationship. This is. due to the construction of the index which includes market prices for many fixed income instruments. This index provides a strong indication as to the impact of Fed policy on financial stress. Clearly, raising rates will tighten conditions. Another way of viewing financial conditions is through a swirligram — a combination of level and changes for a variable. Positive (negative) ANFCI indicator, the vertical axis, will represent tight (loose) conditions. The horizontal axis represents the change in ANFCI. A negative (positive) number will mean deteriorating (improving) conditions. 


Since the beginning of the year, we have seen a steady deterioration of conditions and a movement from loose to tight. There has been an ebb and flow with this decline in conditions with changes in market reaction to Fed statements and policy, but the pull to tightening as been consistent all year.


The highest weights for the ANFCI index which includes over 100 indicators. Th complete list of indicators ANFCI index can found here.




 

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