James Bullard, Essay: What Do Financial Conditions Indexes Tell Us? 

“Furthermore, some variables are better reflections of the stance of monetary policy than others, which may result in a composite measure that doesn’t have the ideal mix. In particular, equity prices are known to be quite volatile and, at times, can move financial conditions indexes substantially. And yet, equity markets can reflect an overvaluation or undervaluation at a moment in time. Therefore, I find that channel less useful in trying to assess the impact of monetary policy.”

“While the STLFSI (St. Louis Fed Financial Stress Index) remained at a low value through early March, financial stress has been on the rise since then in the wake of recent bank failures and turmoil.³ The macroprudential policy response to these events has been swift and appropriate. Regulatory authorities have used some of the tools that were developed or first utilized in response to the 2007-09 financial crisis in order to limit the damage to the macroeconomy, and they’re ready to take additional action if necessary.”

“In my view, continued appropriate macroprudential policy can contain financial stress in the current environment, while appropriate monetary policy can continue to put downward pressure on inflation.”