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Fed Higher Rates Taking Hold, Despite Stock Market Rally

A new economic indicator from the Federal Reserve shows financial conditions remain the most restrictive since the 2008 financial crisis.

That could convince the central bank that its rate-hiking campaign to slow the economy is taking hold.

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FED’S chart

According to the indicator, financial conditions are expected to weigh on economic growth, or gross domestic product, by roughly 0.75 percentage points over the next year.

Rallying stock and home prices have blunted some of the impacts of higher borrowing costs for consumers and businesses—but perhaps less than other indicators gave them credit for.

The Fed’s new public index, meant to reflect its internal model, puts more weight on mortgage rates or corporate-debt yields, and takes into account how future conditions may be impacted by current tightness.

“The Fed is less likely to oppose the stock market rally – unless it gets completely out of hand – than widely feared,” wrote Evercore analysts.


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