The Federal Reserve (Fed) Bank of St. Louis provides investors a weekly gauge of financial stress in the markets with its publication of the St. Louis Fed Financial Stress Index. The Index is constructed using 18 different financial market indicators: seven interest rate series, six yield spreads and five others indicators, including equity and fixed income market volatility. Readings above zero indicate above-average financial stress while values below zero suggest below-average financial stress.
The Financial Stress Index has been declining steadily since oil prices bottomed in February, 2016. Even as credit conditions tightened rapidly with oil and other commodity prices in free fall during the first quarter of 2016, the Financial Stress Index never entered positive territory. This is almost certainly the result of more than eight years of extraordinary global monetary policy accommodation. The challenge now for central banks will be to gradually normalize interest rate policies without creating excessive turbulence across the equity and credit markets.
Key Takeaway:Even though the Federal Reserve is now 18 months into a tightening cycle, the recent decline in the St. Louis Fed Financial Stress Index suggests monetary policy in the United States is far from tight. The Fed still has plenty of work yet to do to normalize interest rate policy, especially in light of tightening labor market conditions and most inflation measures at or above the Fed's 2% target. We expect the Fed to maintain its path towards tighter monetary policy until financial conditions finally begin to feel the effects.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
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