There’s no doubt about it: interest rates are high compared with what we became accustomed to over the past decade or more. It’s pretty clear that the Federal Reserve is no longer in “easy mode.”
But that doesn’t necessarily mean financial conditions are tight
That’s the point of this week’s chart. Interest rates are only one piece of the broader financial-conditions puzzle.
The chart above shows the Chicago Fed National Financial Conditions Index, or NFCI, going back to the early 1970s. The index combines a broad range of financial variables—including interest rates, credit spreads, leverage, and conditions in equity and funding markets—to measure how easy or difficult it is for money and credit to flow through the financial system.
The key level is zero. Readings above zero indicate tighter-than-average financial conditions, while readings below zero indicate easier-than-average conditions.
Today, the index sits around -0.57, which suggests financial conditions are actually fairly loose relative to history.
Look at periods of genuine financial stress. The index surged during the inflation and recession problems of the 1970s and early 1980s. It spiked again during the 2008 financial crisis, when credit markets effectively froze. Even the brief shock surrounding the pandemic in 2020 produced a noticeable jump.
But nothing resembling that is happening today.
Credit spreads remain relatively contained, equity markets have been strong, and liquidity across the financial system remains healthy enough to offset some of the pressure coming from higher rates.
Historically, the more dangerous environment tends to occur when higher borrowing costs are accompanied by broad financial stress—things like rising credit spreads, falling asset prices, and tighter access to capital.
For now, though, the NFCI suggests those pressures remain relatively limited. Interest rates may be high, but the broader financial system is not showing the kind of stress we typically associate with truly tight financial conditions.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.