Monetary Indicators Monitor (Jul.) - Capital Economics
US Economics

Monetary Indicators Monitor (Jul.)

US Economics Update
Written by Paul Ashworth
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The annual growth rates of the main monetary aggregates remain unusually elevated, but the growth rate of bank loans has fallen back. Furthermore, although those monetary aggregates are significantly higher than the level 12 months ago, nearly all that expansion occurred in the early stages of the pandemic, with those aggregates showing no growth whatsoever in the past two months.

  • The annual growth rates of the main monetary aggregates remain unusually elevated, but the growth rate of bank loans has fallen back. (See Chart 1.) Furthermore, although those monetary aggregates are significantly higher than the level 12 months ago, nearly all that expansion occurred in the early stages of the pandemic, with those aggregates showing no growth whatsoever in the past two months.
  • The level of the broad M2 aggregate peaked, not coincidently, around the same time as the monetary base also reached its maximum. (See Chart 2 on Page 2.) Since the monetary base has fallen more markedly than M2 in the past couple of months, there has technically been a rebound in the money multiplier, although it remains close to a record low. (Chart 3.)
  • The drop back in the monetary base – and by extension M2 as well – is due to two factors. First, the overall size of the Fed’s balance sheet has stalled (Chart 4), as demand for its new 13(3) emergency lending facilities has remained weak, at the same time as much of the emergency lending it made in March and April – via central bank dollar swaps and repos – is being repaid. (Chart 5.) In addition, after peaking at $350bn at the apex of the crisis, the Fed has more recently been buying less than $20bn of Treasury securities per week. (Chart 6.)
  • Second, the Treasury has been issuing an unprecedented amount of additional debt, but its spending has failed to keep pace and it now has more than $1.5trn on deposit at the Fed, which is effectively acting as a massive drain on liquidity in the financial system. (Chart 7.) That explains why the monetary base is shrinking even though the size of the Fed’s balance sheet has merely levelled out. It also partly explains what’s happening with the broader money aggregates too.
  • Bank lending has experienced an even more significant reversal. (Chart 8.) C&I loans to businesses initially surged during the pandemic, as firms sought to secure credit to tide them over during the lockdowns. The Treasury fully guaranteed some loans to firms issued by banks via the Paycheck Protection Program. As the lockdowns were eased and businesses reopened, some appear to have paid down their bank loans, while the Treasury is repaying PPP loans that meet forgiveness conditions. That said, with a high proportion of commercial banks indicating that they are tightening lending standards on these loans, access to credit may be becoming a bigger problem for some firms. (Chart 9.)

Chart 1: Monetary Aggregates (% y/y)

Sources: Refinitiv, Capital Economics

Table 1: Monetary Aggregates & Bank Loans (% y/y)

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

M1

4.9

4.5

5.4

5.5

6.7

6.2

6.3

6.5

14.1

26.9

32.7

35.9

38.1

M2

5.0

5.2

5.6

6.4

7.1

6.7

6.7

6.8

10.2

16.9

21.9

22.9

23.3

M3*(1)

7.7

7.9

8.1

8.9

9.3

8.5

8.3

8.1

10.8

17.8

22.1

22.4

22.6

Bank Loans

5.0

5.3

5.1

5.0

5.0

4.8

4.3

4.2

7.4

11.0

10.8

8.7

7.6

(1) M3* is our measure of broad money designed to replicate the M3 series discontinued by the Fed in 2006. Details available on request.

Sources: Refinitiv, Capital Economics

Monetary Indicators Monitor Charts

Chart 2: M2 & Monetary Base ($bn)

Chart 3: Money Multiplier – Non-M0 M2 (As a % of M0)

Chart 4: Fed’s Balance Sheet ($bn)

Chart 5: Fed’s 13(3) Facilities ($bn)

Chart 6: Weekly Fed Purchases of Treasury Sec. ($bn)

Chart 7: Treasury Deposit Account at Fed ($bn)

Chart 8: Bank Loans ($bn)

Chart 9: % of Banks Tightening Lending Standards on C&I Loans

Sources: Refinitiv, Capital Economics, Federal Reserve


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com