Markets' squeal is music to Fed ears — but still too faint
TLT•Recent stock and bond market turbulence has tightened financial conditions, but the Chicago Fed's index remains below its 20-year average and historically loose. A strategist's index is at its tightest since 2022, while the 10-year Treasury yield has risen almost 50 basis points since August and junk bond spreads have widened nearly 100 basis points.
1. Conditions tighten, remain loose
Rising bond yields, wider credit spreads and stock volatility have tightened financial conditions since Federal Reserve Chair Kevin Warsh's August Jackson Hole speech, but the Chicago Fed's National Financial Conditions Index remains below its 20-year average and has been on the loose side for most of the past three years. The index reached its tightest level since April last week, while a Goldman Sachs measure reached its tightest since March.
2. Markets show mounting strain
Since August, the 10-year Treasury yield has risen almost 50 basis points, 30-year fixed mortgage rates are up 70 basis points and junk bond spreads have widened nearly 100 basis points. The VIX reached a four-month high on Friday, and the bond-market volatility gauge MOVE has returned to March levels. Morgan Stanley strategist Mike Wilson and his team said their financial conditions index was at its tightest since 2022 and economically sensitive stocks had lost nearly 10% since August.
3. Fed decision remains uncertain
Warsh said last week that the Fed had removed “a dose of accommodation” with its September rate hike, suggesting he still considers conditions too loose. The article says a December rate rise is the consensus and that a significant further tightening in financial conditions over the next six weeks may be needed for policymakers to hold off at year-end.
