Loan Growth… A Reason for Optimism?

May 17, 2012

Since the 2008 recession began, the Federal Reserve has seemingly used all available tools to stimulate the economy. In particular, the Fed has relied heavily on controlling the Federal Funds Rate, which is the rate that the Fed charges banks for overnight loans. By keeping this discount rate low, the Fed can theoretically stimulate loan growth by making credit cheaper for banks to obtain.

In this week’s Chart of the Week, the percentage change (year over year) of total commercial and industrial loans issued by all commercial banks is compared to the Fed Funds rate. Historically, these have moved in tandem as the Fed raises the rate to control growth of credit during expansions and lowers the discount rate to stimulate credit during recessions. Recently, the Federal Reserve has held the Fed Funds rate near zero in response to the largest contraction of total loans over the last 60 years. It is also interesting to note that despite recent loan growth of nearly 15%, the Fed continues to maintain a near-zero Fed Funds rate.

Although the economy continues to grow more slowly than anyone would like, the recent year over year surge in commercial and industrial loans offers some cause for optimism. Typically, loan growth leads to economic expansion as companies resume investments that were delayed during the previous recession. This direct investment spending helps current economic growth while the resulting increase in productivity from investment drives long term economic growth. As long as the Fed remains committed to keeping the Fed Funds rate near zero for the foreseeable future, it looks like loan volumes should continue to grow and help spur economic growth.