Current National Financial Conditions Index (NFCI) and Background
The National Financial Conditions Index (NFCI) and adjusted NFCI (ANFCI) are each constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1973. Positive values of the NFCI indicate financial conditions that are tighter than on average, while negative values indicate financial conditions that are looser than on average. Similarly, a positive value of the ANFCI indicates financial conditions that are tighter on average than would be typically suggested by economic conditions, while a negative value indicates the opposite.
More information on the NFCI and ANFCI can be found in "Monitoring Financial Stability: A Financial Conditions Index Approach."
The three subindexes of the NFCI (risk, credit and leverage) allow for a more detailed examination of the movements in the NFCI. Like the NFCI, each is constructed to have an average value of zero and a standard deviation of one over a sample period extending back to 1973. The risk subindex captures volatility and funding risk in the financial sector; the credit subindex is composed of measures of credit conditions; and the leverage subindex consists of debt and equity measures. Increasing risk, tighter credit conditions and declining leverage are consistent with tightening financial conditions. Thus, a positive value for an individual subindex indicates that the corresponding aspect of financial conditions is tighter than on average, while negative values indicate the opposite.
More information on the NFCI subindexes can be found in "Diagnosing the Financial System: Financial Conditions and Financial Stress," published in the International Journal of Central Banking.
The nonfinancial leverage subindex of the NFCI best exemplifies how leverage can serve as an early warning signal for financial stress and its potential impact on economic growth. The positive weight assigned to both the household and nonfinancial business leverage measures in this NFCI subindex make it characteristic of the feedback process between the financial and nonfinancial sectors of the economy often referred to as the “financial accelerator." Increasingly tighter financial conditions are associated with rising risk premiums and declining asset values. The net worth of households and nonfinancial firms is, thus, reduced at the same time that credit tightens. This leads to a period of deleveraging (i.e., debt reduction) across the financial and nonfinancial sectors of the economy and ultimately to lower economic activity.
More information on the nonfinancial leverage subindex can be found in "Detecting Early Signs of Financial Instability."
Revisions to the NFCI and ANFCI
The history of the NFCI and the ANFCI can change from week to week depending on incoming data, data revisions and changes in the estimated weight given each financial indicator, although these changes tend to be very small. Because they include a number of monthly and quarterly financial indicators that are regularly revised, revisions to the NFCI and ANFCI will tend to be more pronounced near the beginning of each month. The ANFCI is additionally influenced by economic growth and inflation, as captured by the three-month moving average of the Chicago Fed’s National Activity Index (CFNAI-MA3) and three-month total PCE inflation. As a result, it will tend to show larger revisions to its history over time.
Revisions to the ANFCI can be largely attributed to differences between incoming data on economic growth and inflation and their expected values based on the historical dynamics of the index. A downward revision to the ANFCI can be seen as stemming from one or both of the following factors: a lower than previously expected level of economic activity and a higher than previously expected rate of inflation. An upward revision to the ANFCI can be seen as stemming from one or both of the following factors: a higher than previously expected level of economic activity and a lower than previously expected rate of inflation.