The Kansas City Fed Financial Stress Index (KCFSI) is monthly composite index measure of financial stress in the US economy (see details here). Updated monthly by the Federal Reserve Bank of Kansas City, the KCFSI is based on 11 financial market variables (seven money/bond market yield spreads and four measures of asset price behavior), each of which captures one or more key features of financial stress. Over the last 20 years, the KCFSI has accurately identified episodes of financial stress and has also correctly anticipated changes in overall economic activity. The KCFSI is constructed to have a mean value of zero and a standard deviation of one. Positive (negative) index values indicate that financial stress is above (below) the long-run average of zero.
According to yesterday’s press release, the Kansas City Financial Stress Index (KCFSI) for the month of February continues to indicate that financial stress in the U.S. financial system remains low. The KCFSI fell to -0.61 in February, the lowest reading since June 2007, well before the Great Recession and financial crisis (see chart above). For the last thirteen months starting in February 2012, the KCFSI has been below zero, indicating that financial stress in the US economy has been below average for the last year.
According to this historically accurate measure of stress in the US financial system (money market, bond market, stock market and the banking industry), financial stress remains subdued and below its historical average. The downward trend in the KCFSI since 2009, and the thirteen recent months below zero suggest that the US economy and financial markets have gradually recovered from the Great Recession and financial crisis, and financial stress has returned to its pre-recession and pre-crisis level that prevailed in the 2004-2007 period.