While most economic indicators continue to point to a moderating economy, they generally remain at fairly reasonable levels, suggesting that the US economy should maintain a solid footing in 1Q24.
Recommend to Google a study on nonbank lending. The Rise of Finance Companies and FinTech Lenders in Small Business Lending
Manasa Gopal Philipp Schnabl
Food for thought, looks like academia is saying it adds credit and has an effect on growth. May be one reason FED ignores m2 for better or worse. Goldman has a write up sighting this study that concludes they believe it adds to growth and offsets bank lending to a significant degree. Just something to pay attention to.
Nice summary. Thank you for your work. Question: Is M2 a little less relevant with non bank lending has been growing so much? I know from a theoretical view point it is not new money but there are recent studies suggesting it matters quite a bit. Creating new credit in the system. Also does the yield curve inversion matter less with the change in the banking system from a reserve requirement regime to an ample reserve regime. Banks no longer borrow short and lend long technically because they do not borrow in the FF market. They did not raise, in general, deposit rates with increasing FF rate. Also IOER was a bit of a game changer. Just wondering if this is why the monetary view point has called the recession too early. Thanks for any thoughts.
I think the key point is whether or not the lending creates new money, or instead simply transfers a deposit from one individual/entity to another. In the case of the later, while one entity may now spend more, the other now has less to spend, which should therefore entail that the impact on the economy and inflation is less than if bank lending increases, as in isolation, this increases the aggregate supply of money.
I think you raise some interesting points re the impact of changes in the banking system. As bank deposits form the great bulk of a bank's liabilities, banks are still "borrowing short and lending long", but the shift to an ample reserves regime has had an impact on how aggressively banks, on average, need to compete for deposits - as you point out, this can be seen by deposit rates significantly lagging the increase in the federal funds rate, which has acted to lessen the impact of an inverted yield curve on NIMs.
I do think that this broader liquidity phenomenon has had a significant impact on recession timing. For while historical examples would have suggested that a falling M2 money supply would have likely already had a much bigger impact on the economy, with the Fed's RRP facility continuing to hold a significant amount of funds, this suggests that overall liquidity continues to remain ample.
As a result of significant volumes of "inert" RRP funds shifting into T-bills, and thus funding part of the federal government deficit, this has also acted to offset some of the Fed's tightening, with bank deposits stabilising in response to the RRP drain.
Though with falling M2 already resulting in a significant reduction in inflation (which is continuing to deepen and spread), risks to the economic outlook remain, with the possibility of deflation now more prominent than the risk of high inflation. Risks to the economic outlook are also likely to become more significant once the Fed's RRP facility is fully drained, thus removing this stimulatory offset to the Fed's tightening.
Recommend to Google a study on nonbank lending. The Rise of Finance Companies and FinTech Lenders in Small Business Lending
Manasa Gopal Philipp Schnabl
Food for thought, looks like academia is saying it adds credit and has an effect on growth. May be one reason FED ignores m2 for better or worse. Goldman has a write up sighting this study that concludes they believe it adds to growth and offsets bank lending to a significant degree. Just something to pay attention to.
/Users/himco/Desktop/SSRN-id3600068.pdf
Nice summary. Thank you for your work. Question: Is M2 a little less relevant with non bank lending has been growing so much? I know from a theoretical view point it is not new money but there are recent studies suggesting it matters quite a bit. Creating new credit in the system. Also does the yield curve inversion matter less with the change in the banking system from a reserve requirement regime to an ample reserve regime. Banks no longer borrow short and lend long technically because they do not borrow in the FF market. They did not raise, in general, deposit rates with increasing FF rate. Also IOER was a bit of a game changer. Just wondering if this is why the monetary view point has called the recession too early. Thanks for any thoughts.
Thanks, David!
I think the key point is whether or not the lending creates new money, or instead simply transfers a deposit from one individual/entity to another. In the case of the later, while one entity may now spend more, the other now has less to spend, which should therefore entail that the impact on the economy and inflation is less than if bank lending increases, as in isolation, this increases the aggregate supply of money.
I think you raise some interesting points re the impact of changes in the banking system. As bank deposits form the great bulk of a bank's liabilities, banks are still "borrowing short and lending long", but the shift to an ample reserves regime has had an impact on how aggressively banks, on average, need to compete for deposits - as you point out, this can be seen by deposit rates significantly lagging the increase in the federal funds rate, which has acted to lessen the impact of an inverted yield curve on NIMs.
I do think that this broader liquidity phenomenon has had a significant impact on recession timing. For while historical examples would have suggested that a falling M2 money supply would have likely already had a much bigger impact on the economy, with the Fed's RRP facility continuing to hold a significant amount of funds, this suggests that overall liquidity continues to remain ample.
As a result of significant volumes of "inert" RRP funds shifting into T-bills, and thus funding part of the federal government deficit, this has also acted to offset some of the Fed's tightening, with bank deposits stabilising in response to the RRP drain.
Though with falling M2 already resulting in a significant reduction in inflation (which is continuing to deepen and spread), risks to the economic outlook remain, with the possibility of deflation now more prominent than the risk of high inflation. Risks to the economic outlook are also likely to become more significant once the Fed's RRP facility is fully drained, thus removing this stimulatory offset to the Fed's tightening.