Bank Lending Has Finally Resumed

Looks like the great deflation has finally hit bottom. Today the Federal Reserve reported Total Commercial and Industrial Loans rose for the 2nd week in a row after 16 months of weekly declines. Since Oct 22nd there have been only 11 weekly increases in total loans out of 77 weekly reports.

To be sure, this was a doozey, bottoming out at a year-over-year decline of 20%, the largest decline on record since this data was collected in the mid-70s.

Incontinent Spending

Kudos to Donald J. Boudreaux who used the phrase Incontinent Spending over at our friends' site Cafe Hayek to describe the fiscal policies of the Obama administration.

We've seen or heard some with less self control call that administration full of ... well, you know what, but we try to be family friendly here. Nevertheless, we find this to be one of the best word pictures of the week. We leave it as an exercise for the reader to find the other puns, double entendres, and innuendos in this angle.

Bank Reserves Continued Improvement

Finally, non-borrowed reserve growth took a small drop. Two key interesting points about this: 1) the fed was still slowly creating money as new reserves in March and didn't actually stop agency debt purchases until the 31st. 2) The drop means bank borrowing of free reserves grew faster than the fed was creating money.

Meanwhile, total borrowings from the central bank continues the steady decline. This means banks are unwinding some of the facility loans and using more of their own capital as backdrop against troubled loans.

We still believe fed funds will remain low for an extended period, but we continue to watch these reserve metrics for evidence that a turn of events is around the corner.

Fed Funds Rate History

During the last interest rate stimulated stock market recovery after the dot-com bubble popped, the federal reserve raised it's fed funds rate in July of 2004 (click the 'all' label above the chart). At that time, the market was just a bit over 1 year from it's bull market starting point in the late winter of early 2003. Just before the rate rose, the market had stalled and moved sideways a bit before making it's long run to the 2007 top.

Currently we are about at the same time frame from this markets launch point in the late winter of early 2009. With fed funds still sloshing around at the bottom of the barrel, and unborrowed reserves at astronomical levels, there's no reason to expect the funds rate to rise any time soon. The fed would have to sell everything they have into the repo-market to pull the excess reserves out of the system and get the funds rate to budge even a little.

So if they do want to raise rates, they're going to have to start some serious operations of a different kind to influence this market. Given Bernanke's propensity to come up with creative facilities for implementing policy, there's no telling how or when we will get some insight into their approach. Nevertheless, we are at a juncture where one would expect some kind of policy shift soon, or at least a stock market that takes a breather.

Another reason to anticipate something soon is the closed-door meeting of the board of governors that happened on Monday the 5th. On the weekend that link had the announcement of the unscheduled meeting under special rules of privacy. As we write, it's been removed. Nothing special came out in yesterdays March 16 meeting notes, so we presume the consequences from that meeting won't be known now until the actions are ready to implement.