[ad_1]
They note that the Fed has so far taken interest rate hikes in stride, in part because financial conditions remain very favorable. Oxford Economics makes the same assessment, its own index of financial conditions shows that they have actually become more expansionary this year.
“While the rise in interest rates is impressive, viewed in isolation, it has not been accompanied by any significant and widespread tightening of financial conditions,” they write.
Although long-term interest rates have risen, they are only a small part of the broader financial conditions, where, for example, interest rate differentials and the stock market have not shown any stress to speak of.
“We estimate that financial conditions have in fact continued to support GDP growth, contributing 0.6 percentage points during the first three months of the year,” writes Oxford Economics.
Yet what would it take for the Fed to turn around and act more relieved? Based on history, they conclude that the rise in long-term interest rates should be followed by a stock market correction of more than 10 percent, considerably higher volatility, and a widening of corporate bond spreads.
“We continue to seek such a broad tightening in our financial conditions index, but we note that those who expect the Fed to save them from a rapidly steep yield curve can wait for Godot,” writes Oxford Economics.
