Rosy Financial Conditions Belie the Problems in Borrowing Conditions

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At last week's FOMC meeting, Jerome Powell said, "We think financial conditions are weighing on the economy."

His comments seem sensible, given the following:

  • The Fed is reducing its balance sheet (QT).
  • The Fed funds rate is at its highest level in over 15 years.
  • Mortgage rates are about 7%, 3-4% above pre-pandemic levels.
  • Credit card interest rates are 20% or more.
  • Auto loans range between 7% and 10%
  • Consumer-loan growth, excluding the pandemic, is down to levels last seen over ten years ago.
  • Outstanding commercial and industrial (C&I) loans are declining.

Powell's statement indicates that financial conditions are tight. But they are easy based on the Fed's definition of financial conditions. If Powell doesn't appreciate the difference between financial and borrowing conditions, we must assume most investors do not either.

chicago fed

As I will explain, there is a big difference between financial and borrowing conditions. Easy financial conditions and tight borrowing conditions make monetary policy difficult for the Fed to balance.