Financial System Liquidity

Overview
As in the 1930s, when banking sector credit was contracting or flat, the Fed continues to be the
primary provider of liquidity to the financial system. That measure of liquidity has been rising
modestly recently owing to the currency swap lines from the Fed to liquidity shy central banks.
The banking system's interest earning assets have been rising, but it is interesting that solid growth
of the business loan portfolio has nearly been matched by the continued accumulation of Treasuries
in the investment category. Real Estate loans, which account for 50% of bank loan exposure have
only recently stopped declining and ticked up in Jan. this year, perhaps reflecting a long awaited
recovery of construction spending. Modest improvements in credit demand have so far left the
banks with little need or appetite to bid for more deposit $.

Based on post WW 2 standards, the Fed should be raising short rates now, but with unemployment
still high and housing still very depressed, the Fed is maintaining its ZIRP. This will be interesting
to watch going forward, as the recovery of private sector loan demand continues to broaden out.
Short term business credit demand is up over 10% yr/yr, and the Fed has not seen fit to raise rates
as It always did over the post WW 2 period. Quite something.

Fed Bank Credit & Stock Market
Since the Fed is the major game in town re: liquidity, you should note the importance of the Fed's
Credit account to the market. Investors like positive momentum in Fed Bank credit and shun stocks
when the Fed has this account in flat or contraction modes. Fed Bank Credit