In the outro from August 18's "The Fed's Liquidity Effect: S&P 500 At 3500 By Year End (maybe)" I said:
...I'll have to go back and check the veracity of the "...significant tightening" line but do know for the weeks ending August 5 and August 12 financial conditions have loosened.
The reason for doubting that line is you don't get stock market rallies of the magnitude we've just seen in the face of "significant tightening."
That was in response to the release of the July 26 - 27 FOMC minutes which contained this paragraph (emphasis ours):
Participants concurred that, in expeditiously raising the policy rate, the Committee was acting with resolve to lower inflation to 2 percent and anchor inflation expectations at levels consistent with that longer-run goal. Participants noted that the Committee's credibility with regard to bringing inflation back to the 2 percent objective, together with its forceful policy actions and communications, had already contributed to a notable tightening of financial conditions that would likely help reduce inflation pressures by restraining aggregate demand. Participants pointed to some evidence suggesting that policy actions and communications about the future path of the federal funds rate were starting to affect the economy, most visibly in interest-sensitive sectors. Participants generally judged that the bulk of the effects on real activity had yet to be felt because of lags associated with the transmission of monetary policy, and that while a moderation in economic growth should support a return of inflation to 2 percent, the effects of policy firming on consumer prices were not yet apparent in the data. A number of participants posited that some of the effects of policy actions and communications were showing up more rapidly than had historically been the case, because the expeditious removal of policy accommodation and supporting communications already had led to a significant tightening of financial conditions....
As can be seen in the graph of the Chicago Fed's National Financial Conditions Index, financial conditions have been "loose" since the week-ended May 8, 2020 report—below the zero line—and while conditions may have been trending toward tighter never got close, and in fact since the July 1, 2022 report financial conditions have been loosening, four weeks before the FOMC meeting whose minutes were released this month.
i.e. they knew things were loosening even as they said the opposite in the meeting.
From the Federal Reserve Bank of St. Louis' FRED database:
Frequency:
The Chicago Fed's National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets and the traditional and "shadow" banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.
