Weekly Economic Update: December 4 – December 8, 2017

December 04, 2017

CHART OF THE WEEK

Bank Lending Hasn’t Been the Same Since 2008

Banks Could Lend More

Prior to 2008, private banks would use nearly every dollar of their customers’ deposits above required reserves to issue loans and leases. However, banks now hold sizeable amounts in reserve instead, as the chart shows.

The Fed created these reserves by purchasing treasuries and government-sponsored enterprise (e.g., Fannie Mae and Freddie Mac) mortgage-backed securities. Thus, the Fed rather than private banks now allocates a sizeable portion of private savings as measured by deposits banks accepted from their customers.

Private banks are financially motivated to issue loans that promise the best returns and most efficient uses whereas the government is not similarly motivated.

Correction: Last week’s chart was corrected to read “In the United States, the Federal Reserve has set its IOER rate equal to (or higher than) the fed funds rate since December of 2008.”

LAST WEEK

News & Commentary Weekly Highlights

Wall Street Journal: Yellen Says Fed Will Continue Path of Gradual Rate Increases

Alt-M: Yellen's Defense of Interest on Reserves

Business Roundtable (May 2017): New CEO Survey: Tax Reform Will Lead to More Jobs and U.S. Investment

Wall Street Journal: America’s New Energy Diplomacy

JEC Hearing

The Economic Outlook with Federal Reserve Chair Janet Yellen (Testimony, Video)

Tiberi: Tax Code Major Reason For Business Reluctance, Tax Reform Would Make Critical Improvements

Economy Gaining Strength, Potential For Faster Growth

Top Economic Indicator Highlights

Gross Domestic Product (Final Estimate) (Q3-2017)

Category (seasonally adjusted at annualized rates)	2^nd estimate	1^st estimate
Third Quarter real GDP (RGDP) growth	3.3%	3.0%

Contributions to Q#-2017 RGDP Growth

Noteworthy: Third quarter RGDP growth was revised upward from 3.0% to 3.3% due mostly to more non-residential business investment, inventory investment, and state and local government spending than was initially estimated.

Personal Consumption Expenditures (PCE) Deflator (October 2017)

Category (percentage change from same month last year)	Oct	Sep	Aug
Overall PCE Deflator	1.59%	1.66%	1.44%
Core PCE Deflator (excludes food and energy)	1.45%	1.36%	1.31%

Key Inflation Rate Measures

Noteworthy: The Fed’s main inflation metric slowed slightly this month to 1.59% from 1.66% in September. However, the “core” measure, which excludes volatile food and energy prices, increased to 1.45%.