With interest rates, inflation, and banking stability in the headlines, what signals should everyday people watch to understand where the financial system is headed?

The financial system, which is comprised of financial institutions (banks) and financial markets, moves the savings in the economy to investments via credit and capital flows. Both credit and capital markets provide leading indicators of where the economy is headed.

Banks create credit, and therefore people should look for signs that indicate when banks become more cautious about lending or when they see headlines about banks stress. This means that credit will become harder to get, which can slow the economy even if other indicators look healthy.

They can also look for signs from the financial market. When the term spread, which is the difference between long and short- term rates is positive, it typically signals expectation of economic growth and higher future rates. When it is negative or inverted, it signals expectations of slower growth or even a recession as markets anticipate future rate cuts.