Federal Reserve Economic Data

The Russian invasion of Ukraine and the ensuing economic sanctions imposed by the European Union and the United States have created great volatility in energy markets. Natural gas is intensely used by European households for heating, and most of it is imported. Closing the natural gas spigot from Russia has caused energy prices in Europe to flare up.

The FRED graph above shows International Monetary Fund data for natural gas prices in the European Union (in blue) and in the United States (in red). Between 1991, when the first data are available, and 2008, the commodity price was almost identical on either side of the Atlantic Ocean. Between 2008 and mid-2020, uneven and relatively small differences in price were noticeable. Since then, natural gas prices in the European Union and in the United States have markedly diverged. (Natural gas in its natural state is delivered by regional pipelines and is not as easy to transport globally as petroleum is. So, it’s hard to pin down a global price for it. But the global market is expanding for liquified natural gas.)

The daily price for natural gas in the U.S. didn’t register much of change at the onset of the Russian invasion of Ukraine in late February 2022. In contrast, overall European energy prices have steadily climbed; at the time of this writing, they hover 70% above their value at that time.

However, a combination of new suppliers of natural gas and reduced demand has turned the tide and significantly lowered the price of that commodity in Europe. But this is not the end of the story: Winter is here, natural gas demand will rise, and the military conflict that has been shutting out the closest supplier continues. So, uncertainty about energy prices in Europe will continue to fuel energy market news for the foreseeable future.

How this graph was created: Search FRED for “Global price of Natural gas, EU.” Next, click the “Edit Graph” button and use the “Add Line” tab to add “Global price of Natural Gas, US Henry Hub Gas.”

Suggested by Diego Mendez-Carbajo.

The FRED graph above depicts the St. Louis Fed’s Financial Stress Index (STLFSI). This data series in FRED was created in 2010 to measure changes in U.S. financial market conditions in response to a broad array of macroeconomic and financial developments. In particular, the STLFSI is designed to quantify financial market stress. There’s no specific definition for financial market stress, but periods of stress have historically been characterized by increased volatility of asset prices, reduced market liquidity conditions, or the narrowing or widening of key interest rate spreads. The STLFSI is constructed using 18 key indicators of financial market conditions—7 interest rates, 6 yield spreads, and 5 other indicators.

In late 2021, some Federal Reserve officials encouraged financial market participants and others to consider using an alternative short-term interest rate benchmark because of concerns about the eventual retirement of the London interbank offered rate (LIBOR). Since the STLFSI had two yield spreads based on the LIBOR, we replaced the LIBOR rate with the secured overnight financing rate (SOFR). Specifically, we shifted to the 90-day average SOFR. This rate measures the compounded average of the SOFR over a rolling 90-day period. In other words, it’s a backward-looking measure. We showed that the correlation between the previous version (STLFSI2) and the new version (STLFSI3) was 0.99 over the sample period dating back to December 1993. Click here for details and more information about this switch.

In 2022, we received numerous inquiries about the behavior of the STLFSI during the year. Most asked why the STLFSI was continuing to indicate lower-than-average levels of financial market stress, while other measures showed a “tightening” in financial market conditions. The divergence between the STLFSI and other indexes occurred more or less at the time when the Federal Open Market Committee (FOMC) began to signal its intent to raise its federal funds rate target in March 2022 and, importantly, subsequently signaled that further increases in the policy rate were likely in 2022—and perhaps in 2023.

Our analysis showed that instead of using the 90-day backward-looking SOFR rate, we should have used the 90-day forward-looking SOFR rate. In our view, using the forward-looking SOFR better captures financial market expectations in response to expected changes in the federal funds rate and its attendant effects on other asset prices and yields.

The second FRED graph plots the STLFSI4 and the STLFSI3 since early January 2020—just prior to the financial market turmoil and deep recession spawned by business and government actions designed to counteract the COVID-19 virus. In the graph, the two versions track each other closely over most of this period. But the close comovement began to erode in early February 2022, as it became clear that the FOMC was poised to begin raising its policy rate to combat an inflation rate that was the highest in 40 years. For example, the correlation between STLFSI3 and STLFSI4 was 0.993 from the week ending December 31, 1993, to the week ending January 28, 2022. Since the week ending February 4, 2022, the correlation has declined to 0.526.

A final takeaway from this second graph is that the new measure of the STLFSI shows that financial market stresses during the current Fed tightening episode are moderately higher compared with the previous version. Still, levels of financial market stress are currently near their historical levels. (In the index, zero is designed to be an “average” level of stress.) Moreover, the current Fed tightening episode has not triggered the kind of financial market stress seen during the heights of the pandemic-spawned shutdowns in the economy.

How these graphs were created: Search FRED for “Financial Stress Index” and make sure to take version 4. For the second graph, take the first, click on “edit graph,” open the “add line” tab, and search for “Financial Stress Index,” making sure to take version 3.

Suggested by Cassandra Marks, Kevin Kliesen, and Michael McCracken.

Inflation is at a 40-year high—as measured by either the consumer price index or the personal consumption expenditures price index.

Federal Reserve officials have long believed that controlling inflation is a necessary condition for achieving the Congressional mandates of price stability and maximum employment. Implicit in this belief is the view that high inflation—particularly if it’s unexpected—imposes a broad array of economic costs on the economy.

For example, parts of the U.S. tax code are not annually adjusted for inflation. Inflation is a tax on cash balances. And high inflation can worsen uncertainty about future interest rates, which tends to raise financial market volatility and lower prices for financial assets such as stocks and bonds. In short, high inflation reduces the efficient allocation of resources in a market economy.

The Great Inflation, from the late 1960s to the early 1980s, was a prime example of the corrosive effects of high inflation. U.S. inflation rose sharply, as did the unemployment rate; but it also became much more volatile. High and volatile inflation meant the FOMC was never sure in real time if a decline in inflation was temporary or longer lasting. These distorted inflation signals contributed to the “stop-go” policy of the 1970s, including the tendency to ease policy when inflation fell. But inflation did not return to its previous rate. It rebounded rapidly and eventually rose to more than 14% in 1980. This turbulence increased the volatility of real GDP growth as well.

The FRED graph above shows four recessions in about a dozen years—roughly every three years beginning with the 1970-71 recession and ending with the 1981-82 recession. Until the 2007-09 recession, the 1973-75 and 1981-82 recessions had been the deepest in the post-WWII period. Also, there was a sharp slowing in labor productivity growth around 1973 that lasted for 20 years, until the microchip-led productivity boom commenced around 1994.

There were many factors that led to the Great Inflation—both bad luck and bad policies:

• oil and commodity price shocks that reduced aggregate supply
• rising transfer payments that helped boost aggregate demand
• the imposition (and subsequent loosening) of price controls imposed after the Camp David meeting in 1971

However, as former Federal Reserve Chairman Paul Volcker demonstrated early in his tenure, one key ingredient that was lacking during the Great Inflation was a commitment to restore price stability.

How this graph was created: Search for and select the CPI series in FRED. Restrict the sample period to 1966-01-01 to 1982-12-10 with the date picker above the graph, the slider below the graph, or your mouse (by highlighting the period you want in the graph itself. From the “Edit Graph” panel, change the units to “Percentage change from year ago.”

Suggested by Kevin Kliesen.