Chicago Fed National Financial Conditions Index

Hey everyone and thanks for jumping back Into the macroverse Today we're going to talk about the Chicago fed National Financial Conditions index or nfci if you guys Like the content make sure you subscribe To the channel give the video a thumbs Up and also check out into the crypto Versus premium uh into the let's go ahead and jump In So we have discussed before the idea That cryptocurrencies in general might Be a measure of excess liquidity and one Of the things I want to talk about in This video is the financial conditions Index The National Financial conditions Index because it really does give some Credence to the idea that risk Assets in General are more so a function of of you Know the overall Financial conditions in The US economy whether we're in Fairly Strict monetary conditions or under Fairly loose monetary conditions So one of the things I want to look at Closely here is what has been going on Over the last year or so if you zoom in To the financial condition and by the Way if you're not familiar with this With this um indicator it's basically Just a weighted average of 105 measures Of financial activity and it was Essentially constructed to have an Average value of zero with a standard

Deviation of one over a sample period Sending back to 1971. so you'll see that It more or less just oscillates around Zero and when it's above the white line The horizontal white line when it's Above zero that's during a period of Relatively strict monetary conditions or Tight monetary conditions when it's Below zero that means the monetary Conditions are fairly loose okay what do You notice Over the last year or so Monetary conditions still remain Somewhat loose okay So despite everything I mean despite the Fact the Federal Reserve has hiked Interest rates to 4.75 percent and the Fact that they've rolled off a lot of Assets from the balance sheet and so on And so forth monetary conditions have Not actually gotten to a a restrictive Level as per this metric which is why I Think you'll see you've seen a lot of People today sort of raise an eyebrow at Powell's comment yesterday that Financial conditions are relatively Tight when that's not really what a lot Of the indicators are telling us now If you zoom in here Um one of the things you might notice And it's interesting how it how it sort Of works out when this is going up Towards the zero line you can see the S P 500 so the blue line is going down

Right so The nfci The National Financial Conditions index going up Markets going down when it levels off a Little bit At all right when there's any type of Easing in the short term the market took Off again right it took off again in March And then when it started to pick up pace Again the market started to go back to The downside Right And then you get to July and you'll Notice a certain June July started to Curve back the other way and as Financial conditions started to loosen The market went back up and then in August when the financial conditions Started to tighten again going all the Way out into October the market went Back down so you can see again as Financial conditions become tighter the S p goes down When they become looser the s p goes up And then recently since October despite The fact that the Federal Reserve has Continued to raise interest rates Overall the not the National Financial Conditions index shows the monetary Conditions have become looser and looser And during this time the S P 500 has Continued to Rally all right So to some degree this goes against what

Powell said in his in his press Conference that we're you know that We're under fairly tight monetary or you Know tight fairly tight monetary Conditions Um and so on and so forth when this is Kind of showing the reverse of that it Actually has been showing the financial Conditions have been have been getting Quite a bit looser Since October if you take a weekly Change and Um and and sort of look to see where Things are because I often think it's The rate of change of the metric that Matters more so the metric itself what You might notice Is when it you know when it when it goes From negative to positive right so when It starts or at least when it starts to Trend back higher so look at what Happens when this metric starts to turn Back higher The market usually Goes down Right so when this is trending back up But when this metric is going down The market can often go back up to the Upside and you'll see that you know You'll see it many many times right here This metric the weekly change is going Down and as it's going down the s p the Blue line is going up And you can continue to see that

Recently though starting from like September The weekly change is going down the Market's going back up right and then This started to go back up but then it Didn't really go back up in the same way That it had before and it pulled back Relatively quickly and so now it's still All the way back down here so again when You look at this metric and you look at The overall restrictiveness of the Current Financial conditions we're Actually you know we've actually seen Seen a loosening of financial conditions Really since October which still it goes Against what Powell said in his press conference so You know this is one more indicator that I think it's worthwhile to add to your Toolkit it's not going to tell you Everything that you need to know about Financial markets but surely Seeing Financial conditions loosen has Been a very positive thing for risk Assets like equities and Cryptocurrencies and when Financial Conditions get tighter It's generally not a good thing okay as As liquidity dries up Coldplay this is Useful uh if you if you like the content Again make sure you subscribe we do have Into the crypto versus premium and into The several different Tiers available including a free one

Make sure you check it out I'll see you Guys next time bye


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