Financial conditions in the United States continued to loosen last week even as Federal Reserve officials pushed back against the idea that they would cut interest rates early and often this year.
The Federal Reserve Bank of Chicago said its index of national financial conditions declined in the week ending January 19, the 13th straight weekly decline for the index.
The index is currently lower than at any point since the final months of 2021, several months before the Federal Reserve began raising interest rates to bring inflation down. Monetary policy is thought to primarily work through tightening financial conditions.
The steep and ongoing loosening of financial conditions may forestall any interest rate cuts from the Fed by ameliorating the risk the hikes in 2022 and 2023 could lead to an overly tight monetary policy.
The economy appears to have accelerated in recent weeks. On Wednesday, S&P Global released results of its survey of business executives showing output growth quickening to the fastest pace in seven months. Mortgage applications have been climbing for three consecutive weeks, both an indication of loosening financial conditions and a spur for more growth ahead. Retails sales in December came in much higher than expected.
Fed officials, including Atlanta Fed president Raphael Bostic and Fed Gov. Christopher Waller, have warned in recent weeks that the Fed is likely to move more cautiously than current market prices imply.