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St. Louis Fed Financial Stress Index Suggests Fed Might Try to Calm Markets

By    |   Thursday, 27 June 2013 08:24 AM

The St. Louis Federal Reserve's Financial Stress Index has jumped in recent months, rising from about -0.8 to -0.4.

It hasn't increased that much since Standard & Poor's cut the U.S. government's credit rating in August 2011. It also jumped during the Greek debt crisis in May 2010 and, of course, during the financial crisis of 2008 when it reached a peak of over 6.0.

The stress measure, based on a total of 18 different interest rates, yield spreads and other financial indicators, began rising the second week of May, according to CNBC.

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In previous times of financial stress, the Fed intervened to calm markets. For instance, it extended swap lines to central banks in 2010, and in 2011, the Fed announced that rates would remain low for at least two more years. Those experiences suggest the Fed may again intervene.

Stocks dropped and bond yields spiked last week when Fed Chairman Ben Bernanke outlined the central bank's timetable for winding down its monthly bond purchases. If its forecasts for economic recovery hold, the Fed might start reducing bond purchases late this year and end them completely by mid-2014.

Financial markets appear to have stabilized since then.

"There appears to be relative calm ... following a calamitous period since the Fed threatened to take away the steroids," said Mike McCudden, head of derivatives at Interactive Investor, according to The Associated Press.

Investors are also worried about slowing growth and a possible credit bubble in China.

"If markets had had only that to worry about then maybe the current sell-off mightn't have been so steep," Michael Hewson, senior market analyst at CMC Markets, told the AP. "Unfortunately when you put concerns about China into the mix as well it makes for a rather potent mix for risk aversion."

Fitch Ratings has warned that China may be facing the worst credit bubble ever, caused mainly by its opaque shadow banking system of trusts, wealth-management funds and offshore vehicles that allows companies to avoid regulations and hide enormous amounts of debt.

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," Charlene Chu, Fitch's senior director in Beijing, told The Daily Telegraph.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are and what the quality of assets is, and this undermines signaling."

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The St. Louis Federal Reserve's Financial Stress Index has jumped in recent months, rising from about -0.8 to -0.4. It hasn't increased that much since Standard & Poor's cut the U.S. government's credit rating in August 2011.
St. Louis,Fed,stress,rates
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2013-24-27
Thursday, 27 June 2013 08:24 AM
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