Economics Weekly: What Might Cause Financial Conditions to Tighten?

The FOMC this week moved an inch closer to declaring the start of the tapering program, while also bringing forward by one year the expected date of interest rate lift-off. This was a sensible precautionary move given the faster-than-expected pace of the economic recovery and inflation, as well as the flood of liquidity in the system as indicated by the surge in demand for reverse repo following the increase in the Fed's IOER.

Following Wednesday's Fed announcements, there were sharp movements in the dollar, credit spreads, the stock market, and Treasury yields, which helped provide a small window as to where some areas of market vulnerability might exist, and what might cause the current extremely loose financial conditions to tighten in the coming months. In this Economics Weekly, we discuss current financial conditions, with the view that, at a minimum, credit conditions will not get any easier than they are at the moment, and what might drive that change.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.