Only two weeks ago, Fed Chairman Kevin Warsh said markets had done "quite a bit" of the Fed's tightening. Wall Street has since taken it all back — and then some. A gauge of US market conditions published by Bloomberg rose Thursday to its easiest level since 1996, capping a remarkable reversal from late July.
"Financial conditions" is Wall Street shorthand for how easy or hard markets are making it to take risk and raise money. Rising stocks, calmer markets, and cheaper corporate borrowing make them easier. Falling stocks and rising borrowing costs tighten the screws.
The index in the chart is especially geared toward those market signals, so this isn't saying mortgages or credit cards are suddenly cheap. It's saying Wall Street itself is unusually loose. Between Warsh's first Fed meeting on June 17 and his next on July 29, Treasury yields rose, stocks slipped, volatility jumped, and corporate borrowing got more expensive.
The Fed left its benchmark rate untouched at 3.5% to 3.75%, but markets tightened around it. "The markets have done quite a bit," Warsh said. Since July 29, the S&P 500 has jumped nearly 7%, the VIX volatility gauge has dropped six points to the lows of the year, and junk-bond borrowing costs have fallen.
The Fed's benchmark rate hasn't budged. The appetite for risk is already showing up across the market. Wall Street's riskiest trades are suddenly back on top, from Cathie Wood's ARK Innovation ETF (ARKK) to IPOs and other speculative corners that had been left behind.
This isn't happening because long-term interest rates suddenly collapsed. Since Warsh's first meeting, the 10-year Treasury yield (^TNX) has actually risen. Yet the chart's measure of market conditions has raced to a 30-year extreme.
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