Tracking Recent Levels of Financial Stress
Advisory: This article is based in whole or in part on the CFSI (Cleveland Financial Stress Indicator), an indicator that was discontinued by the Federal Reserve Bank of Cleveland in 2016 due to the discovery of errors in the indicator’s construction. These errors overestimated stress in the real estate and securitization markets. As a result, readers should be cautious and interpret any analysis based on CFSI data with those errors in mind.
The level of the Cleveland Financial Stress Index (CFSI) has decreased in the past few months, indicating a lower level of systemic financial stress. Although the most recent reading of the index from September 4 is in Grade 2 or a "normal stress period," the index had been in a Grade 1 or "low stress period" for 49 days since June 1. The index currently stands at -0.43, which is up 0.63 points from a recent low on July 15, 2013. (The points refer to the standardized distance from the mean or the z-score). The index is down 1.32 points over the past year and is 3.52 points lower than its historical peak in December 2008.
A key feature of the CFSI is its ability to decompose the total level of system stress into each of the six financial submarkets represented in the index. These six financial submarkets include credit, equity, funding, foreign exchange, securitization, and real estate. (The data for these submarkets are reported in levels and are not standardized into z-scores.) A broad comparison of recent trends in these markets can be made by looking at monthly observations. The chart below shows monthly levels of stress in each market as of the first business day for each of the past four months. Using the comparison, we observe moderate declines in stress in the credit and real estate markets and more significant decreases in the securitization markets. Foreign exchange markets experience a modest stress increase, and funding markets remain flat. However, equity markets show alternating volatility.
A look at the CFSI and the component data for 2013 allows for a more detailed analysis. The slight increase in overall stress observed in mid-June around the time of a Federal Open Market Committee meeting appears to have been driven by a rise in the level of stress in equity and foreign exchange markets. The stress levels in these markets waned in early July, and the overall level of stress decreased. The CFSI rose again slightly in late July and through August as the increased contributions of equity and foreign exchange markets surpassed the declines in the securitization, credit, and real estate markets. In early September, political tensions in the Middle East increased, coinciding with a rise in the CFSI from Grade 1 to Grade 2, as stress in the equity and foreign exchange markets rose.
Recently, improvements have been made to make information and data for the CFSI more accessible to the public. A snapshot view of the current level and grade of the CFSI is available on the Federal Reserve Bank of Cleveland's homepage, while more detailed information can be found by navigating to the CFSI's webpage. Previously, users could download only the historical CFSI composite series. Now the component market data analyzed above are also available for download. Both the CFSI and component datasets are posted daily to the website at 3 pm ET.