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(Mis)interpreting the Fed
What Goes Up
Financial Conditions Have Tightened a Lot
If you did a PCA principal component analysis on financial conditions and reflected that to central bank policy, those five are the ones that matter the most. So it's an index, meaning that there's a weighting that gets attached to each one of those five variables or five components. And then you come up with a number, right? And that becomes your index. It's just like a typical, it's like calculating any old index. And that's what you measure.
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