Accommodation Index

The Accommodation Index remained positive for the first quarter of 2025, indicating the Federal Reserve has continued its return to an easy monetary policy even though inflation remains elevated. The economy has weakened over the past three months, as evidenced by the recent first quarter GDP increase of only 0.3%, and this weakness is likely to continue in the tariff-laden environment. The Federal Reserve will be under pressure to further ease monetary policy, even while inflation remains elevated due to a combination of the tariffs and built-up excess monetary accommodation from the Covid era. The result is that inflation likely will persist, causing further hardship for consumers.

The Accommodation Index remained positive for the first quarter of 2025 at 1.1, versus a revised 0.2 for the fourth quarter of 2024, which was the first positive reading since the beginning of 2022, suggesting that central bank policy continues to be accommodative even though inflation remains elevated.

The Accommodation Index, calculated quarterly, was developed to assess central bank policy by looking at the sum of the difference between money supply and GDP growth and the difference between inflation and interest rates. Negative values indicate restrictive policy, while positive values indicate accommodative policy. The growth component for the quarter was positive at 1.7, the second consecutive positive reading since mid-2021, more than offsetting the negative rate component of 0.6.

Central bank policy has returned to being accommodative even though inflation remains elevated.

The Accommodation Index turned positive for the fourth quarter of 2024 at 1.1, the first positive reading since the beginning of 2022, suggesting that central bank policy has returned to being accommodative even though inflation remains elevated. The risk is that inflation will remain above the Fed’s 2% target, leading them to halt or reverse their recent rate-cutting.

The Accommodation Index, calculated quarterly, was developed to assess central bank policy by looking at the sum of the difference between money supply and GDP growth and the difference between inflation and interest rates. Negative values indicate restrictive policy, while positive values indicate accommodative policy. The growth component for the quarter was positive at 2.7, the first positive reading since mid-2021, more than offsetting the negative rate component of 1.6.

The Index had been negative since the third quarter of 2022, following an extensive period of mostly positive readings dating back to the financial crisis.

The Federal Reserve continues to maintain a restrictive monetary policy as measured by our Index. 

The Accommodation Index remained negative for the third quarter of 2024 at -6.1, the same as the revised second quarter reading, suggesting that central bank policy continues to be restrictive as inflation has moves lower toward policy targets. At some point in the future, the economy will likely react negatively to the restrictive policy. Still, it is not possible to point to a specific timeline as central bank actions work with long and variable lags.

 The Accommodation Index, calculated quarterly, was developed to assess central bank policy by looking at the sum of the difference between money supply and GDP growth and the difference between inflation and interest rates. Negative values indicate restrictive policy, while positive values indicate accommodative policy.  Both components were negative for the quarter, with readings of -2.2 for the growth component compared to the prior revised -3.5 and -3.9 for the rate component compared to the prior -2.5. The recent and expected Federal Reserve rate cuts likely will be insufficient to move the Index into positive territory over the coming quarters.

 The Index has been negative since the third quarter of 2022, following an extensive period of mostly positive readings dating back to the financial crisis.