2024

Strong

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The US Financial Conditions Index has fallen to its lowest level since the first quarter of 2022.
It saw its largest year-over-year decline in three years, wiping out the effects of the interest rate hikes that started in March 2022.
This steep decline started in October last year and continues at a rapid pace. The last time financial conditions loosened this quickly was in March 2020, when the Fed slashed rates to near zero in response to the COVID-19 crisis.
Now though, restrictive Fed policies are unraveling. Markets have already priced in more rate cuts, at least 75 basis points expected in 2024.
And this has caused concerns. Many wonder if the Fed is acting too quickly again, undoing its work of the past two years in controlling inflation and tightening the economy.
<h3 id="span-style-font-weight-400-what-s-the-us-financial-conditions-index-span">What’s the US Financial Conditions Index?</h3>
The US Financial Conditions Index tracks the health of financial markets. It covers money markets, debt, and equity markets. The index shows how easy it is to get credit.
When the value is negative, it means financial conditions are loose. Borrowing becomes easier and cheaper. When the value is positive, credit becomes harder to access.
The restrictive policies the Fed put in place, like interest rate hikes, have been neutralized. Credit is once again easy to access, and borrowing costs are low.
Some are questioning whether the Fed’s decision to cut interest rates by 50 basis points (bps) was a mistake.
The idea was to give the economy a boost and help avoid a recession. But with financial conditions now this loose, it looks like the Fed acted too aggressively.
<h3 id="span-style-font-weight-400-strong-job-market-shifts-fed-outlook-span">Strong job market shifts Fed outlook</h3>
Jerome Powell’s job got a lot more complicated with the September payroll data. The US economy added 254,000 jobs, blowing past the Dow Jones forecast of 150,000.
It was the highest increase in months, with companies and the government stepping up hiring across the board. This includes food and drinking establishments, healthcare, and government sectors.
These sectors have been propped up by fiscal policies, with government spending pushing the 2024 deficit close to $2 trillion.&nbsp;
This strong job market means the Fed doesn’t need to worry as much about a recession, at least for now. But it also puts pressure on the central bank.
A stronger labor market often leads to higher wages, which can reignite inflation, something the Fed was trying to control with those rate hikes.&nbsp;
The strong job numbers mean the Fed is unlikely to repeat its 50 bps cut anytime soon. In fact, futures markets have adjusted their expectations.&nbsp;
Before the jobs report, they expected a half-point cut in December. Now, it is a quarter-point cut in November and another quarter-point in December, according to the CME Group’s FedWatch gauge.
The problem is, while the jobs data looks great, there are some concerns. For one, a lower-than-usual response rate in the survey means the numbers might not be as strong as they appear.
These data could be revised downward in future reports. But for now, the labor market is defying expectations, giving the Fed more breathing room.

US Financial Conditions Index dips to record lows: Is the Fed still in charge?

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