US Economics Weekly: June employment supports patience over hikes

Research evidence excerpt

US Economics Weekly: June employment supports patience over hikes

IdeaM

Financial Conditions: Moderately more restrictive than pre-

conflict levels

Following the conflict in the Middle East and the uncertainty it brings to the next steps for

monetary policy, we include the evolution of our FRB/US-based model of financial

conditions, which aims to capture how changes in asset prices weigh on future economic

activity. The index includes five daily variables: the 10-year Treasury yield, S&P 500

returns, the corporate BBB credit spread, the valuation of the U.S. dollar, and the price of

oil. These are aggregated based on their estimated growth elasticities relative to the

federal funds rate, using the Federal Reserve’s FRB/US model. As a result, the index can be

interpreted as the equivalent change in the federal funds rate, expressed in basis points,

required to generate a similar effect on economic activity.

Since hostilities in the Middle East began on February 28, the tightening in financial

conditions is equivalent to about a 39bp rise in the federal funds rate. The tightening

since February 28 reversed the easing seen earlier in the year, most of which was driven

by a weaker U.S. dollar. The net tightening since February 28 has been driven mainly by a

reversal in dollar weakness and higher 10-year U.S. Treasury yields. Since the signing of

the MOU between Iran and the US, oil prices have eased and their contribution to a

tightening in financial conditions has disappeared. Buoyant equity markets and credit

spreads have offset some of the overall tightening. Since the June FOMC meeting,

financial conditions have tightened by 21 bp, primarily driven by U.S. dollar appreciation.

Exhibit 12: Financial conditions have tightened following the conflict in the Middle East