FCI*

Central banks rely on r* — the neutral interest rate — to assess monetary policy stance. But monetary policy works through broad financial conditions, not just the short-term rate. Financial conditions indices (FCIs) aggregate the effects of market interest rates, stock prices, house prices, and exchange rates into a single measure of how tight or loose financial markets are. FCI* is the neutral level of this index consistent with output at potential — the r* of the U.S. financial system.

FCI gaps — the difference between actual financial conditions and FCI* — provide real-time guidance on whether financial conditions are pushing output below or above potential.

Ricardo Caballero, Tomas Caravello, and Alp Simsek

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Estimates through —

FCI and FCI*

The FCI series shown is the FCI-G baseline index (3-year lookback) from Ajello et al. (2023). It is measured in units of percentage points of next-year GDP growth: a reading of +1 means financial conditions will reduce GDP growth by approximately 1 percentage point next year. FCI* is our estimate of its neutral level.

Financial Conditions Gap (FCI − FCI*)

The gap between observed financial conditions and their neutral level. A positive reading means financial conditions are tighter than neutral — restraining output relative to potential. A negative reading means conditions are looser than neutral — pushing output above potential.

Output Gap

Real-time estimate of GDP relative to potential, in percent. Positive values indicate an overheating economy; negative values indicate slack.