When financial conditions are tight, economic growth tends to be slower (and vice versa). Furthermore, when financial conditions are loose, inflation tends to be higher (and vice versa). As of right now, the NFCI sits at -0.39 which is another leg down from the previous week (-0.37) as financial conditions continue to loosen despite higher interest rates. To put this into perspective, the NFCI was at -0.23 during the first week of January 2023 which shows that financial conditions have loosened slightly across risk, credit, and leverage indicators.
The NFCI can be used to indicate pivot points in financial markets because index scores above “0” (the average) have been historically associated with tighter-than-average financial conditions. In addition, index scores below “0” have been historically associated with looser-than-average financial conditions. If the NFCI should move above “0” we could be in for a bout of volatility because financial conditions are still looser than average. See below for a link to the Chicago Fed’s NFCI data.