What Happens to EM Dollar Index When Financial Conditions Tighten?
What happens when the Chicago Fed NFCI signals tight financial conditions? How credit conditions transmit through the economy and what it means for every asset class.
How EM Dollar Index Responds
Scenario Background
The Chicago Fed National Financial Conditions Index (NFCI) distills 105 measures of financial activity into a single number. A positive reading means financial conditions are tighter than average; a negative reading means looser than average. The index captures credit availability, leverage, risk pricing, and funding conditions across the entire financial system.
Read full scenario analysis →Historical Context
The NFCI spiked to +3.0 during the 2008 financial crisis, the tightest financial conditions since the Great Depression. It reached +1.0 briefly during the March 2020 COVID shock before massive Fed intervention loosened conditions within weeks. The 2022-2023 tightening cycle pushed NFCI from deeply negative (-0.5, very loose) toward zero as the Fed raised rates from 0% to 5.25%. The NFCI remained negative despite aggressive Fed hikes, which frustrated policymakers who wanted tighter conditions to...
What to Watch For
- •NFCI rising above 0 and staying there for 4+ weeks, sustained tightening
- •Credit sub-index driving the tightening, bank lending and bond market conditions deteriorating
- •Risk sub-index spiking, volatility and risk aversion dominating
- •NFCI and the adjusted NFCI diverging, financial conditions not consistent with the economic backdrop
- •Fed officials citing NFCI in communication, they are monitoring the same dashboard
Other Assets When Financial Conditions Tighten
Other Scenarios Affecting EM Dollar Index
Get scenario analysis and EM Dollar Index alerts delivered to your inbox.