Is there really a monetary tightening going on in the United States? (2/2)

Powerful inflationary biases are spreading across the economy, unlike anything that has happened in recent decades. However, the Fed does not seem ready to fight them.

The authorities were forced for political reasons to do something against inflation, they gave the great speech of rigor at the public level, at the level of the perceived financial conditions of the market. But, at the same time, they encouraged relaxed financial conditions in the other segment, that of real financial conditions, the banking segment!

More credits, more money

To put things in perspective, here are some numbers to keep in mind:

Loan growth averaged $ 363 billion annually over the period 2000 to 2019. In the second quarter of 2022 alone, bank lending grew at a staggering 17.3%. Over the past year, these loans have increased by 10.5%. Counting only the first half of the year, loan growth in 2022 ($ 721 billion) has already surpassed the 2005 record of $ 685 billion.

“Consumer loans” have increased by $ 281 billion in the past four quarters, or 12.7%, surpassing the 2010 annual record of $ 269 billion. Annual growth averaged $ 77 billion from 2000 to 2019. Bank lending grew by $ 222 billion, or 14.9% annualized, surpassing the previous quarterly high of $ 156 billion, dating back to the second quarter of 2004. Bank lending was up $ 417 billion, or 7.3%, over last year.

The GSE boom also continues unabated. Bonds issued by these companies increased $ 269 billion during the quarter, or 9.8% at an annualized rate, to reach a record $ 11.195 billion. It should be noted that the highest annual growth of these stocks in the period from 2009 to 2019 was $ 317 billion, in 2019.

However, at the same time, Treasury bond issues fell sharply, to just $ 34 billion in the second quarter, still hitting a new high of $ 26.051 billion in total.

On the corporate side, it is not surprising, given the market environment, that corporate bond growth has been contained. However, the additional $ 54 billion in the second quarter reversed the $ 28 billion contraction in the first quarter. In one year, these bonds increased by $ 370 billion, or 2.5%.

The effect repurchase agreements

The ” repurchase agreements (Fed buybacks of very short-term securities, theoretically to provide liquidity to banks in an emergency) jumped 30% year-on-year. On the contrary, passive reverse repo from the Federal Reserve jumped to $ 448 billion, with 135% year-over-year growth. They have exceeded $ 2 billion every day since June.

To put the enormous growth of these into perspective ” reverse repo it must take into account the corresponding decline in banking system reserves held at the Fed. The Fed’s “deposit-taking reserves” therefore decreased by $ 642 billion during the quarter.

When the Fed buys securities (i.e. does QE), it pays for those transactions by issuing “immediately available funds” – or Fed “IOUs” – that circulate through the system bank, where these funds become reserves held by the Fed. The subsequent stages of QE they flooded the banking system with funds / reserves.

With the introduction of his reverse repo the Fed essentially created a new IOU that would circulate outside the banking system. Instead of processing the Fed’s cash through the banking system (where it became additional bank reserves), Wall Street firms, money market funds and GSEs could simply trade the immediately available funds with the ” reverse repo by the Federal Reserve.

The Fed’s balance sheet is just shrinking

It is essentially the Fed trading one IOU for another. For three quarters, the reverse repo they increased by $ 725 billion, while “deposit-taking reserves” contracted by $ 904 billion.

The Fed’s total liabilities still fell by $ 43 billion in the second quarter to $ 8.918 billion. But, in one year, this liability increased by $ 830 billion, or 10.3%. In one of the most dramatic monetary inflation in history, the Fed’s liabilities have risen by an unprecedented $ 4.7 trillion, or 111%, over the past 10 quarters.

While the Fed’s balance sheet is just down, household equity is not, which fell $ 6.1 trillion in the second quarter to $ 143.763 billion.

And while equity was hit by declining stock prices, it’s worth noting that household real estate properties rose by $ 1.422 billion in the quarter to a record high of $ 45.531 billion.

Despite pockets of weakness in funding, credit inflation continues unabated. On a seasonally adjusted and annualized (SAAR) basis, non-financial debt increased at a rate of $ 4.316 billion during the second quarter. This is more than double the annual average of $ 1.846 billion for the decade 2010 to 2019, and the 2020 record of $ 6.796 billion is expected to be broken.

Finish the DIY

In summary, there are powerful inflationary biases that permeate the entire economy, unlike anything that has happened in the past few decades. It is important to note that securities markets no longer completely dominate and dictate the financial conditions of the system.

Loans and bank credit have become strong drivers of credit growth, along with ongoing deficit spending and expansionary GSEs.

While they prefer not to talk about credit growth, Fed officials no doubt know these numbers. They also need to know that inflation will not return to their 2% target until they orchestrate a sharp decline in credit (with a host of negative consequences).

They were forced to abandon the idea that tinkering with financial market conditions would work. Now the Fed is embarking on a major tightening cycle until something works. And between the state of the US financial accounts and the recent speculative dynamics of the market, there is certainly no reason to go back on the idea that “rates will increase until something breaks”.

[NDLR : Retrouvez toutes les analyses de Bruno Bertez sur son blog en cliquant ici.]

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