Two Fed financial stress measures show conditions still easy
Composure restored. Despite gut-clenching stock market swoops and a violent 100 basis point upward spike in 10-year bond yields since the Fed’s June 19 meeting and press conference with Chairman Ben Bernanke, financial conditions are still very easy.
That ought reassure officials at the U.S. Federal Reserve that some normalcy has been restored in financial markets after the abrupt reaction to their decision to signal they would scale back bond purchases later this year.
A persistent upward scramble in yields and mortgage rates could chill spending and investment, potentially undermining economic recovery.
Good news then from the Chicago Fed’s weekly barometer, which showed conditions creeping up in the week to July 5 from a measure of -0.69 from -0.71 the week before, but still well away from territory that would signal real stress. Positive values show conditions are tighter than average and while negative values are looser.
Meanwhile, a separate monthly index from the Kansas City Fed edged to -0.45 in June from -0.65 in May, its seventeenth consecutive month below the long-run average.
Said the KC Fed:
Yield spreads had minimal effect on the index in June … Most of the increase can be attributed to the implied volatility of overall stock prices (VIX) and the cross-sectional dispersion of bank stock returns.