Financial Conditions Are Loosest Since 1994

I was reading an article today that the Chicago Fed released their National Financial Conditions Index (NFCI)  and according to their research, financial conditions in the United States are the loosest since January of 1994.  Of course, that was early on in the dot com bubble, before it even “bubbled up”, it was just at the beginning of that bull market, yet the Federal Reserve has been tightening; raising interest rates for a couple of years.  They’ve been talking about shrinking the balance sheet – why is it that financial conditions are looser now than they were when the Fed was still at zero?

Fed Behind the Curve

I have been talking about this the whole time.  The Fed is so far behind the curve.  Yes, they have raised interest rates, but it is too little too late.  Even the official inflation rates have risen as much if not more than the rate hikes. Meanwhile, the stock market keeps going up and now that you have the dollar going down, a weakening dollar actually adds to the loosening of financial conditions which are obviously going to get a lot looser if the Fed doesn’t really start jacking up rates faster, which I don’t think they are going to do.

Relapsing Back into Recession

In fact, I think they are going to get ready to cut rates again and loosen financial conditions even further as the economy relapses back into recession, which I said in my last podcast, would have already been here had Hillary Clinton won the election.  Since Donald Trump won, all this false optimism is delaying the onset of that recession for a year or two, but it’s not preventing it. So if financial conditions are this loose now, when the Fed is tightening, imagine how much looser they’re going to get when the Fed is easing.