Rates: Hiking In Good Weather

Written by: Global Thought Leadership | September 28, 2018

Source: Bloomberg, September 28, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

THE BOTTOM LINE

  • In the wake of the FOMC’s unanimous decision to raise its target rate to 2.25%, attention has been primarily focused on how many more hikes are likely over the coming year.
  • The Fed’s readiness to move forward comes against a background of persistent economic strength. The news is also good according to the Bloomberg U.S. Financial Conditions Index, a multifactor measure of the health and availability of the financial system to provide the credit needed to run – and grow – the economy.
  • The Index compares the system’s current condition to the pre-crisis period, defined as from 1994 to July 1, 2008. Values greater than zero, according to Bloomberg, indicate “accommodative” financial conditions, while negative values reflect “tighter” conditions relative the baseline pre-crisis period.
  • As of September 28, 2018, the index, at 0.935, was solidly in the “accommodative” range, close to the highest values reached over the period shown.
  • This measure is also consistent with Fed Chair Powell’s description of the economy as strong, and the FOMC’s stance as continuing to be “accommodative” in his remarks at the post-decision press conference. Mr. Powell described the removal of that word from the Fed’s statement to be pro-forma rather than a reflection of change in the FOMC’s opinion about the state of the financial system.
  • The bottom line: The Fed is in the fortunate position of raising rates into economic conditions that appear – at least for now – to be capable of bearing the change. 
  • For more on the Fed’s stance toward the current economic environment, read Western Asset’s Accommodative No Longer?.

 


Definitions:

The Bloomberg U.S. Financial Conditions Index (BFCIUS) tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms. The index is a Z-Score that indicates the number of standard deviations by which current financial conditions deviate from normal (pre-crisis) levels.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

 

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