Analysis: Time to taper? Not if you look at bank loans
By Peter Rudegeair
(Reuters) - The U.S. Federal Reserve decided to hold off on scaling back its bond-buying program on Wednesday, and at least one reason for its choice may have been a stubbornly weak economic indicator: bank lending.
Since the bottom of the recession just over four years ago, commercial bank loans and leases have grown 4.0 percent, one of the weakest post-recession recoveries in terms of borrowing since the 1960s, according to Paul Kasriel, the former chief economist of Northern Trust Company. For comparison, over the same period after the July 1990-March 1991 recession, loans and leases grew over four times faster.
"Given what's happening to bank credit and given that the economy isn't booming, I would say it was very wise that the Fed did not choose to cut back on its asset purchases at this point," Kasriel said in an interview.
In recent weeks, residential mortgage lending has dropped and commercial lending growth has slowed as Fed officials have talked about starting to wind down their bond buying stimulus program. That talk of "tapering" spooked bond markets, lifting long-term borrowing costs.
The Fed noted in its statement that mortgage rates have risen, and added that "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."
The central bank's statement underscores the narrow line the Fed must walk now between preventing asset bubbles and nurturing an economic recovery. As the Fed slows down its pace of bond buying in a program known as "Quantitative Easing III," it will cool markets that may be overheated.
But it also risks making credit harder to come by, which could hurt a recovery that by many metrics looks tepid.
Banks say they are more than happy to lend now, and that the real problem is that customers are less interested in borrowing.
"The need for additional capital from the banking system isn't really there," said Perry Pylos, the head of commercial banking at Wells Fargo, about why corporations have not been drawing down their bank credit lines.
A commercial lending executive at a large regional bank said, "we see more risk aversion today than we did three, four, five years ago."
That risk aversion stems from doubt about future economic growth, and from big companies having other options for borrowing, most notably bond markets, bank executives and economists said.
"Corporations have great balance sheets and just don't trust the economic recovery," said Ethan Harris, the co-head of global economics research at Bank of America-Merrill Lynch.