Potential For Financial Conditions Pushback?

With equities up, the dollar weaker and yields falling since the last Fed meeting in mid June, the FOMC meeting next week looks as though it will come against the backdrop of loosening financial conditions.

• Since the last meeting, the Fed staff introduced a new Financial Conditions Index "that can be used to gauge broad financial conditions and assess how these conditions are related to future economic growth".
• More specifically, versus the 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."
• We only have the Fed's estimates through May for this index, which showed a roughly 0.75pp drag on GDP for the subsequent year (with conditions portrayed as tight as they've been since the Global Financial Crisis).
• While daily/weekly indices (such as those published by the St Louis and Chicago Feds, and Bloomberg / Goldman Sachs) have told a more benign story, in some cases they are pushing to extremes, at or near the loosest since mid-2021 before the Fed signalled it would start hiking.
• Past Minutes in this cycle indicated concerns "unwarranted easing in financial conditions....would complicate the Committee's effort to restore price stability".
• One key aspect to watch at next week's meeting is the degree to which Powell comments on the direction of financial condition developments, especially with the Fed's decision to pause in June largely predicated on fears of banking sector turmoil that have failed to materialize.