To: Jacob Snyder who wrote (52688 ) 5/31/2000 11:25:00 PM From: John Madarasz Respond to
Leading vs. Lagging Indicators - Real M2 vs. Real C&I Loans The economy didn't miss a beat coming out of the late 1998 corporate bond market shutdown and the surge in C&I lending. Why should it be any different now? Because the Fed very quickly started up "damage control" operations in 1998, cutting the fed funds rate by 75 basis points between late September and mid November. This lowered the cost of C&I bank credit and helped re-open the corporate bond market. It was an easy call for the Fed back then. Inflation was only a figment of Kasriel's imagination and the rest of the economic world was in a delicate condition. But don't expect a rerun of 1998 in 2000. Higher inflation is no longer a forecast; it's a fact (except to those in denial, such as Kudlow and his New Error fellow travelers). The rest of the economic world is on the mend. And Greenspan winces at the thought that he might have created a moral hazard by bailing out investors in 1998. No, the Fed is not likely to cut rates any time soon. Rather, it is more likely to raise rates a bit more before the year is over. Banks already are tightening up their lending terms to corporate borrowers. With loan charge-offs on the rise, lending terms are likely to tighten even more. So, I would not view the recent surge in C&I loan growth as an indicator of stronger economic growth ahead, but rather as an indicator of an economic slowdown ahead. The Fed is shifting back its supply curve of credit to the economy. Corporations need to continue a high pace of borrowing in order to maintain capital spending and share buyback programs. Meanwhile, bond market investors are growing more wary of the quality of corporate credits. As a result, credit quality spreads in the corporate bond market are now the widest they have been since late 1998 - early 1999. As shown in the chart below, corporations are turning to their banks for funding much as they did in late 1998 when they were being shut out of the bond market. ntrs.com
