U.S. Financial Conditions — St. Louis Fed Financial Stress Index: persistently loose conditions with episodic volatility
The St. Louis Fed Financial Stress Index (STLFSI) is a composite, weekly measure designed to summarize stress in U.S. financial markets. It aggregates information from interest rate spreads, yield curve components, volatility measures, and other market-based indicators, standardized so that zero represents long-run average financial stress. Negative values indicate looser-than-average conditions, while positive readings reflect above-average stress.
Recent dynamics
Throughout 2024, the index remained firmly in negative territory, indicating broadly accommodative financial conditions despite a restrictive monetary policy backdrop. Weekly observations fluctuated within a loose range, with occasional short-lived upward moves but no sustained approach toward neutral or positive stress levels. This pattern points to resilient market functioning and continued risk tolerance across credit and funding markets.
During 2025, financial conditions continued to oscillate around a clearly negative baseline. The series exhibited brief episodes of tightening, including a notable spike into positive territory in April 2025, but these proved transitory and were quickly reversed. Subsequent readings returned to negative levels and remained there through late 2025 and into early 2026, reinforcing the impression of episodic volatility rather than a structural tightening of financial conditions.
Interpretation and economic signal
A persistently negative STLFSI indicates that financial markets are not transmitting restrictive signals to the broader economy, even in an environment of elevated policy rates. The absence of sustained positive readings suggests that credit spreads, funding conditions, and volatility have remained contained, allowing financial conditions to cushion rather than amplify macroeconomic headwinds.
The episodic spikes observed during 2025 are best interpreted as localized or event-driven stress rather than systemic strain. Their rapid reversion underscores the depth of liquidity and the continued willingness of markets to absorb shocks without a lasting repricing of risk. In this context, financial conditions appear decoupled from late-cycle labor-market softening, acting as a stabilizing force rather than a source of contractionary pressure.
Conclusion
The St. Louis Fed Financial Stress Index signals a prolonged period of loose financial conditions through 2024 and 2025, punctuated by brief and reversible stress episodes. Despite occasional volatility, the index has not exhibited a durable shift toward neutral or stressed territory, indicating that financial markets remain broadly supportive of economic activity. The prevailing configuration points to financial conditions that are accommodative on balance, limiting the transmission of restrictive monetary policy into systemic financial stress.