Inflation Series: Part 5 Lending is INCREASING as rates rise
If the Fed was hoping higher interest rates would slow lending and economic growth, they are sadly mistaken. As we saw in the lead up to 2008, as rates increase, the incentive to lend increases because higher yields mean higher interest income.
This implies that the money supply affected by credit expansion is increasing rapidly at the same time the Fed is trying to slow things down. In our view, credit market expansions are an important part of money supply and associated inflation/deflation.
Here is the key question: with long-term yields now falling, will the credit expansion slow thus starving the real economy of cash to keep expanding? This is highly likely and very much in line with our 2023 cyclical views on inflation and interest rates: lower next year.
If you'd like to discuss how to manage through this environment, please reach out to us firstname.lastname@example.org.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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