Less tight financial conditions as exhibited by the red-hot stock market may increase the chances that the Federal Reserve hikes rates again before the end of the year, some economists reckon, even as financial markets put little odds on that happening.
Several measures of financial conditions, including those mceproduced by the central bank, have shifted in way that signals reduced restraint on the economy, at a time when central bank officials believe more work may be needed to lower inflation.
“Easy financial conditions obviously boost near-term growth,” and can encourage more risk-taking of the sort that can lean against the restraint the Fed is trying to impose on the economy, said Benson Durham, head of global policy at Piper Sandler.for June moved to 0.458, from May’s 0.603 reading. The index, now the lowest since August 2022, seeks to describe whether financial conditions are aiding or restraining growth, so the latest reading points to them providing less drag on the economy.
Tighter financial conditions have helped accomplish the Fed’s desire to slow down the economy in a bid to lower inflation pressures from multi-decade highs. But now things are shifting the other way, which could create issues for the Fed as it approaches the endgame for its tightening cycle.The various gauges on balance show financial conditions reached their most restrictive levels late last year, and have receded since.
“We will do what it takes to get inflation down and in principle, that could mean that if financial conditions get looser, we have to do more,” Powell said. “But what tends to happen, though, is financial conditions get in and out of alignment with what we're doing, and ultimately over time we get where we need to go.”
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