Already sitting on double-digit losses this year, stock market investors must brace for more. As the realisation sinks in that the U.S. Federal Reserve intends to tighten financial conditions to get on top of red-hot inflation.
Essentially, financial conditions measure how easily households and businesses can access credit, so are critical in showing how monetary policy transmits to the economy. Fed boss Jerome Powell repeated on Wednesday he will be keeping a close eye on them.
And they have a bearing on future growth – Goldman Sachs estimates a 100 basis-point tightening in its proprietary financial conditions index (FCI). This which factors in rates, credit and equity levels as well as the dollar – crimps growth by one percentage point over the following year.
Goldman’s and other indexes from the Chicago Fed and IMF all show financial conditions have tightened significantly this year but remain loose historically, a testament to the scale of stimulus unleashed to help economies weather the pandemic.
Sven Jari Stehn, chief European economist at Goldman Sachs, estimates the bank’s U.S. financial conditions index will need to tighten somewhat further for the Fed to achieve a “soft landing”, i.e. to slow growth but not excessively. Goldman’s U.S. FCI is at 99 points – 200 bps tighter than at the start of the year and the tightest since July 2020. Conditions tightened 0.3 points on Thursday, as shares tanked, the dollar hit two-decade highs and 10-year bond yields closed above 3%.
– Reuters
