Fed's Financial Conditions Index Loosened In June

The Fed's Financial Conditions Impulse on Growth (FCI-G) Index - updated last week through the month of June - suggests that on a one-year lookback basis, financial conditions in June 2023 were their least tight since March 2022, while the 3Y index was at the least restrictive since August 2022.

• The Fed staff introduced the FCI-G in June "to gauge broad financial conditions and assess how these conditions are related to future economic growth". Versus traditional FCIs, which "typically measure whether financial conditions are tight or loose relative to their historical distributions, the new index assesses the extent to which financial conditions pose headwinds or tailwinds to economic activity."
• This index's pullback is closing the divergence with most market-based financial conditions / stress indices which continue to point to relatively loose conditions - which got even looser through July (including after the Fed hike) based in large part on rising equities and the softer USD.
• These higher-frequency indicators will have reversed in the past few days with rising Treasury yields, a stronger dollar and weaker stocks, but only partially. Overall they are at levels consistent with the loosest financial conditions of the past 7-10 years.
• In response to an MNI question at July's press conference, Chair Powell said "we will do what it takes to get inflation down and in principle, that could mean that if financial conditions get looser we have to do more. But what tends to happen though is financial conditions get in and out of alignment with what we're doing, and ultimately over time we get where we need to go".
• The Fed's measure suggests that the headwinds to GDP growth - while they haven't yet flipped to tailwinds - are dissipating.