GS On Fed’s New FCI

Fed staff economists last week introduced a new indicator of financial conditions called the financial conditions impulse on growth (FCI-G) [found here], constructed using similar inputs to Goldman’s own FCI.

• “On a like-to-like basis, the two indicators show broadly similar growth effects from financial conditions over time, and the growth drag implied by both indices is likely to fade meaningfully in the coming months.”
• Three notable differences: i) the Fed’s FCI-G suggests financial conditions affect growth with a longer lag than GS' FCI impulse by about one to two quarters. The FCI-G implies a ~0.5pp larger drag on GDP growth than the GS FCI impulse over the next year.
• ii) the FCI-G includes the Zillow monthly index of house prices and mortgage rates. The GS FCI does not as they choose to consider house prices and housing affordability separately from financial conditions in their consumption and investment forecasts, in part because house price indices are only released monthly and are subject to substantial revisions.
• iii) the Fed’s FCI-G implicitly assumes that financial conditions affect growth but not the other way around, where GS allow for changes in market prices to affect growth and vice-versa.
• “Although we estimate that the drag on GDP growth from financial conditions is fading sharply, we expect tighter bank lending standards—which are not included in either our FCI or the Fed’s FCI-G—to impose an additional drag on growth in the coming quarters. Taken together, we expect tighter financial and credit conditions to exert a 0.9pp drag on 2023 Q4/Q4 GDP growth.”