Central bank officials believe additional work may be needed to cut inflation, and certain financial conditions measures, including those provided by the central bank, have moved in a way that reduces economic restriction.

The Fed and markets are diverging as these metrics weaken.

Benson Durham, Piper Sandler’s global policy head, said that easy financial conditions boost near-term growth and can encourage risk-taking that goes against the Fed’s economic prudence.

The Federal Reserve’s June Financial Conditions Impulse on Growth dropped to 0.458, the lowest since August 2022, indicating that financial circumstances are helping growth.

Since March 2018, the Fed has aggressively raised its short-term interest rate goal from near zero to between 5.25% and 5.5% after a quarter-point hike on Wednesday.

Financial tightening is an aim, with mortgage rates reaching 7% and other borrowing costs increasing.

The Fed may raise rates or maintain stable in September, but it doesn’t say if it may hike by another quarter percentage point by year’s end.

Despite the market forecast, easier financial conditions increase the probability of another rate hike by year’s end.