What It Measures
The St. Louis Fed Financial Stress Index (STLFSI) measures financial market stress using 18 weekly data series including:
- Interest Rates: Fed funds rate, Treasury yields, corporate bond yields
- Yield Spreads: Corporate spreads, TED spread, commercial paper spreads
- Volatility: VIX, bond market volatility
- Other Indicators: S&P 500 returns, exchange rate volatility
The index uses principal component analysis to extract a common stress factor from these variables.
Why It Matters
Real-Time Stress Monitor: Weekly updates provide timely warning of emerging financial stress.Crisis Detection: Spikes in the index have coincided with major financial market disruptions.Simplicity: Single number summarizes complex financial market dynamics.Historical Comparison: Normalized construction allows comparison across different time periods.
How to Interpret
Zero is Normal: Index is constructed so zero represents average historical conditions.Positive = Stress: Values above zero indicate above-average financial stress.Below Zero = Calm: Negative values indicate below-average stress, favorable conditions.Magnitude Matters: Values above +1 indicate significant stress; above +2 is severe.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Above +2 | Severe financial stress (crisis levels) |
| +1 to +2 | Elevated financial stress |
| 0 to +1 | Mild stress, above average |
| -1 to 0 | Below-average stress, calm markets |
| Below -1 | Very low stress, complacency risk |
Historical Context
The STLFSI reached its all-time high of +5.5 in October 2008 during the financial crisis. It also spiked briefly to +5.8 in March 2020 during the COVID panic. Between crises, it typically fluctuates between -1 and +1.