Markets’ selloff is music to Fed ears — but still too faint
SPY•Recent declines in stocks and bonds have tightened financial conditions, but gauges remain loose enough that the Federal Reserve may need further tightening to curb inflation. The Chicago Fed’s index reached its tightest level since April, while Morgan Stanley’s measure hit its tightest since 2022.
1. Conditions tighten, remain loose
Since Fed Chair Kevin Warsh’s August Jackson Hole speech, the 10-year Treasury yield has risen almost 50 basis points, mortgage rates are up 70 basis points and junk bond spreads have widened by nearly 100 basis points. The Chicago Fed’s National Financial Conditions Index rose to its tightest level since April, but remains below its 20-year average and on the historically loose side.
2. Market volatility increases
The S&P 500 and Nasdaq are broadly unchanged since Jackson Hole, while the VIX reached a four-month high on Friday and the MOVE index returned to March levels. The article says a potential reversal in the AI rally and financial strains at highly leveraged AI firm CoreWeave could affect broader financing conditions.
3. Fed decision in focus
Morgan Stanley strategist Mike Wilson and his team said their financial conditions index, based on rates, the dollar and energy prices, was at its tightest since 2022; economically sensitive stocks have lost nearly 10% since August. Warsh said the Fed “removed a dose of accommodation” with its September hike, and the article says a significant further tightening may be needed to keep policymakers from raising rates at year-end if they skip a hike next week.
