Financial Conditions Index
A Financial Conditions Index (FCI) measures the overall tightness or looseness of financial markets.
Meaning in Practice
The index aggregates variables such as interest rates, credit spreads, equity prices, and exchange rates. It provides a broad assessment of financing conditions in the economy. Central banks and research institutions publish FCIs regularly.
Why It Matters
Financial conditions influence borrowing costs, asset prices, and economic activity. An easing index supports growth, while tightening can slow expansion. Policymakers use it to evaluate the stance of monetary policy.
Market Impact
A tightening FCI may lead to lower equity prices and higher volatility. An easing environment often supports risk assets and credit markets. Bond yields react depending on inflation and growth implications.
Example
If credit spreads widen and equity markets decline, the index may signal tightening financial conditions.