Financial System Liquidity

The growth of total financial system liquidity continued to moderate in Apr. but remaians
a hefty 10% yr/yr. Transactional liquidity, which excludes the large volume of excess or free
reserves, grew at 6.3% over the period. Because growth has been mild and inflation low,
transactional liquidity growth has left a modest excess above the needs of the real economy
which has been a small positive for the capital markets. Banking system balance sheet liquidity
(excluding excess reserves) has moved lower as lending has picked up but is still ample by historic
standards.

The Fed is slowly easing into a period of short term interest rate suppression as shorter range
credit demand has swung more vigorously positive. Even so, with idle resources in the
economic system and a short term credit supply / demand pressure gauge at only +2.5 in
favor of demand, the Fed is meeting its ZIRP commitment without real strain in the
financial markets yet.  

Breadth of loan categories seeing expansion is improving save for residential real estate
where lending standards have yet to be loosened appreciably. Banks are doing cash flow
test lending now rather than collateral value only lending, but young home buyers face stern
reviews.