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Caroline Baum: Using level of long-term rates to assess financial conditions is a mistake

Right now, the inverted yield curve points to an increased risk of recession, while various financial conditions indexes say conditions are easy.

Financial conditions are all the rage among central bankers.

And for good reason. Monetary policy involves setting a short-term rate. Changes in the policy rate — a rate unavailable to businesses and consumers — are transmitted to the economy-at-large via various channels, including market interest rates, stock prices and the value of the currency.

As Federal Reserve Chair Jerome Powell explained at a congressional hearing last week, “policy works through financial conditions.”

They are, so to speak, a guide post for the Fed.

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