COTW: Financial Conditions

November 14, 2022COTW: Financial Conditions

  • The Goldman Sachs U.S. Financial Conditions Index tracks the current position of financial variables in the U.S. that influence economic activity and therefore the future state of the economy. The index includes variables such as short- and long-term interest rates, U.S. dollar strength, credit spreads, and equity valuations. The higher the index, the tighter financial conditions, and vice-versa.
  • Federal Reserve Chair, Jerome Powell, has repeatedly emphasized the importance of tightening U.S. financial conditions in order to bring inflation back under control. However, last Thursday saw the second-largest one day easing in financial conditions since 2017, following the softer than expected October CPI results.
  • The key question that now arises is whether this lower inflation print is enough to convince the Fed that it has won the fight against inflation, therefore allowing for looser financial conditions, or whether the Fed will again respond hawkishly in fear that this market reaction may unravel its progress in bringing inflation down, as was the case post July’s CPI print and FOMC meeting.


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