Analyzing Financial Conditions

Structures financial conditions index analysis by decomposing composite indices into credit, equity, funding, and volatility components, then assessing their contributions to overall tightening or easing.

When To Use

• Interpreting movements in composite financial conditions indices (e.g., Chicago Fed NFCI, Goldman Sachs FCI, Bloomberg FCI)
• Decomposing which subcomponents — credit spreads, equity valuations, funding costs, or volatility — are driving shifts in conditions
• Assessing whether current financial conditions are transmitting or offsetting monetary policy stance
• Tracking financial stress build-up ahead of potential credit events or recessions
• Comparing financial conditions across economies or time periods for policy analysis

Inputs To Gather

• Index selection: Which FCI(s) to analyze (NFCI, GS-FCI, Bloomberg, or custom composite) and their construction methodology
• Component data: Credit spreads (IG, HY, TED), equity market levels and valuations, short-term funding rates (repo, CP, LIBOR-SOFR), implied and realized volatility (VIX, MOVE)
• Reference period: Historical baseline for z-score or percentile comparisons (typically 1971-present for NFCI, or a custom window)
• Policy context: Current fed funds rate, forward guidance stance, QT/QE status, and any recent policy shifts
• Macro backdrop: GDP growth trajectory, inflation readings, labor market conditions — needed to interpret whether conditions are appropriately tight or loose