Global Macro Monitor

The Fed’s attempt to tighten monetary policy is being cannibalized by the private sector’s accelerated easing of financial conditions through market-based financial instruments.  The following chart is simply stunning.   

Since the Fed began its monetary tightening campaign in March 2022, lifting rates from zero to 5 percent, overall national financial conditions have eased significantly,  as measured by the Chicago Fed’s National Financial Conditions Index (NFCI). 

The NFCI  is an index of a weighted average of 105 market financial indicators that cover a wide spectrum of the financial system, including the money markets, debt and equity markets, and the traditional and “shadow” banking systems. 

Our quick “blink” review of the NFCI, going back to early 1970s shows the Fed doesn’t start cutting rates until there is a spike in the NFCI, which, given the weights in the index, usually occur with an adverse credit event.

We believe this will be a major issue debated at the Tuesday/Wednesday FOMC meeting between the doves and the hawks, and will most likely result in some hawkish rhetoric coming from Mr. Powell’s post-meeting presser.  Seat belts?  

Mr. Market is pricing close to a 50 probability of an interest rate cut in March.  Zero chance, in our opinion,  if the markets continue on the merry way.

As always, we reserve the right to be wrong, as we often are.  

Stay frosty, folks.