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Fed assertion of 'tight' conditions looks shaky

Ben Bernanke
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Ben Bernanke

One of the Federal Reserve's primary reasons to hold off from reducing the amount of its monthly asset purchases fails to ring true.

When the U.S. central bank stunned the market last week with a decision not to "taper" its $85 billion monthly bond buying program, it cited three reasons.

One was the restraint fiscal policy was putting on growth, and another was a general displeasure with economic data.

The third reason was a "tightening of financial conditions" that the Open Markets Committee said "if sustained, could slow the pace of improvement in the economy and labor market."

However, there appears to be little evidence of the tightening that the Fed cited.

(Read more: Fed in 'monetary roach motel': Schiff)

Only a rise in long-term interest rates, which saw the benchmark 10-year Treasury note briefly eclipse a 3 percent yield, seemed to fit the Fed's definition.

That move in rates came primarily after Chairman Ben Bernanke indicated in May that tapering was forthcoming.

Deutsche Bank economist Joe Lavorgna pointed out in a note that "other key inputs used in estimating financial conditions barely showed any tightening" from the time Bernanke spoke to Congress on May 21 until Wednesday's FOMC meeting.

Using the Chicago Fed's National Financial Conditions Index (NFCI) as a baseline, LaVorgna said the measure barely budged during the period, despite the rise in rates.

(Read more: What the Fed shockermeans for investors)

The index is comprised of 100 indicators; a reading above zero indicates tightening, while a negative reading points to the opposite.

On Sept. 13, a week before the Fed meeting, the index showed a -0.77 reading, almost perfectly in line with its average reading from January until Bernanke's May tapering remarks.

A separate measure that adjusts the index for "current and past economic activity and inflation prior to the construction of the index" was only slightly positive but only a bit higher than its springtime readings.

(Read more: 'Dr. Doom' Roubini makes case FOR the US economy)

The evidence, then, seems to be balance against the Fed's position.

"Consequently, we believe it is hard to conclude that financial conditions have tightened," LaVorgna said. "Despite this, some policymakers such as (New York) Fed President (Bill) Dudley, continue to argue otherwise. In the interim, financial markets remain perplexed."

_ By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

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