The Fed wound up its quantitative easing program at the end of Q 1
2010, so we are now seeing a leveling off in its balance sheet, as well
as a flattening out of the monetary base and the basic money supply.
Liquidity in the system is being further constrained by the continuing
run-off of financial co. commercial paper and a drawdown of low and
no reserve jumbo deposits.
Some areas of the banking system's loan book are picking up after
months of decline, including consumer loans, credit card balances
and even C&I loans to business. To fund an expansion on the asset
side of the balance sheet, banks are doing more open market
borrowing for now.
In the short run then, the Fed has left target interest rates unchanged
but it may have just started tightening up on the provision of liquid
balances to the system. From a long term perspective, I would much
prefer to see the Fed be moderately more liberal with the provision
of monetary liquidity, but its foot is off the accelerator for now.
Should the Fed continue with the current liquidity tightening regimen,
My stock market support and long term economic growth indicators
will start to lose positive traction as it would suggest the economy
will grow more dependent on private sector credit creation. These
would be normal non-fatal developments as the economy recovers,
but I regard loss of growth momentum of monetary liquidity as
signalling an upturn in fundamental risk.
It is still a little early to proclaim that short term business credit
demand has turned the corner and is headed up, but a turn does
seem to be getting closer. A turn in business loan demand strong
enough to reverse the downtrend of my credit supply / demand
gauge would be another factor in favor of the Fed raising target
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!