FAST FIVE: US Bank Deposit Flight Not A Sign Of Higher Rates To Come

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US Bank Deposit Flight Not A Sign Of Higher Rates To Come Authored by Simon White, Bloomberg macro strategist, Bank deposits at US commercial banks are starting to decline. This is an early warning sign of a weakening US economy – not of higher spending and rising inflation – and so does not necessitate tighter Fed policy than is currently priced.

Total deposits at US banks swelled almost $5 trillion through the pandemic to peak at over $18 trillion, taking the bank loan-to-deposit level to the lowest in at least 50-years at under 60%.

But now, deposits are beginning to fall from their high level.

This a sign of a weakening economy, not one that is about to face an imminent and renewed inflationary impulse. In fact, falling deposit growth is empirically a sign of declining inflation.

This is counter-intuitive on first glance, but banks create deposits when they create loans, so at the margin deposit growth is driven by loan growth.

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