Bank Credit Is Flat After Having Expanded Since November 15th
Bank credit (i.e. liquidity) has been on the upswing since November 2023, although it has flatlined over the past several weeks. Banks extend credit, thereby growing the money supply. Therefore, when the Fed says that it is tightening monetary policy via Fed Funds rate increases as well as its QT program, we know the Fed is telling a half-truth as it knowingly failed to mention its backdoor QE program - the Bank Term Funding Program (BTFP).
When banks truly tightened credit in March 2023, the Fed panicked and rolled out its BTFP, the latest and greatest bank bailout. The Fed is more bite than bark. The BTFP bailout devalued the Dollar and marked a return to dovish Fed policy.
What now? If the banks begin to suck wind in April and May once the BTFP expires on March 11th, we will likely see a return to lower interest rates, perhaps even the return of QE.
Everything with the banks hinges on the repeal of the BTFP in my view. Let’s see what direction bank credit (chart 1) takes in 2H March. Bank deposits (chart 2) follow the path set by bank credit.
