What It Measures
The National Financial Conditions Index (NFCI) measures financial conditions using 105 indicators across three categories:
- Risk (33 indicators): Volatility, credit spreads, counterparty risk measures
- Credit (33 indicators): Credit conditions, debt growth, lending standards
- Leverage (39 indicators): Debt levels, margin requirements, asset valuations
The index is constructed to have an average of zero and standard deviation of one, with positive values indicating tighter-than-average financial conditions.
Why It Matters
Comprehensive View: Captures financial conditions across multiple markets in one number.Leading Indicator: Tight financial conditions often precede economic slowdowns.Fed Monitor: The Federal Reserve uses financial conditions indices to gauge policy transmission.Credit Availability: Shows how easy or difficult it is for businesses and consumers to access credit.
How to Interpret
Zero is Average: Positive values = tighter than average; Negative values = looser than average.Standard Deviations: Values above +1 indicate significantly tight conditions (stress).Trend Matters: Rapidly tightening conditions are concerning even if the level is near zero.Adjusted NFCI: The Chicago Fed also publishes an "adjusted" version that removes economic activity effects.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Above +0.5 | Tight financial conditions, stress emerging |
| 0 to +0.5 | Slightly tight conditions |
| -0.5 to 0 | Slightly loose conditions |
| Below -0.5 | Loose financial conditions, easy credit |
Historical Context
The NFCI spiked above +3 during the 2008 financial crisis, representing extreme financial stress. It also briefly spiked during March 2020. Since 2010, it has generally remained below zero, indicating loose financial conditions.