investment viewpoints

Loan growth aggravates risk of a monetary policy mistake

Loan growth aggravates risk of a monetary policy mistake
Pascal Menges - CLIC Equities, CIO Office

Pascal Menges

CLIC Equities, CIO Office
Florian Ielpo - Head of Macro, Multi Asset

Florian Ielpo

Head of Macro, Multi Asset

In the latest instalment of Simply Put, where we make macro calls with a multi-asset perspective, we consider whether a rise in loan issuance by US banks could ultimately lead the Federal Reserve to accelerate its monetary tightening agenda.


Need to know

  • The Federal Reserve’s hawkish shift caused markets to fall in January 2022, even though the Q4 2021 earnings season was solid. 
  • Interestingly, the banking sector reported a significant increase in loan issuance.
  • Yet, increased aggregate demand at a time of elevated inflation may lead the Fed to accelerate its tightening and add to 2022’s main market risk – that of a monetary policy mistake.


A turbulent start to the new year

In January 2022, markets suffered their worst start to the year since the great financial crisis (MSCI World Index: -5.3%). This decline came with a rotation caused, to a certain extent, by the Federal Reserve (Fed) indicating its plans to halt asset purchases in March and begin hiking rates soon after. These actions seek to control rising inflation, which stems from the demand shock triggered by the extensive fiscal stimulus during 2020 and 2021 combined with the re-opening of economies. Will January’s negative performance be a precursor to a rockier 2022?


Robust earnings: a counter to a hawkish Fed?

In general, a 1% increase in rates causes growth stocks to lose about 5% and value stocks to lose about 2.5% (based on statistical analysis). This is roughly what happened in January 2022. The MSCI World Growth lost 9% and the MSCI value lost 1.5% as the 2Y US Treasury increased by 100 bps.

However, the impact of rate increases could be absorbed by increases in earnings. Our estimates show that it takes an earnings surprise of around 2.5% to make up for a 1% rate increase1. So far, the Q4 2021 earnings season has delivered strong numbers, as illustrated in Chart 1. Earnings and sales growth are up 35% and 17%, respectively, and earnings and sales surprises are up 5% and 3% respectively. Such supportive results, reflective of economic growth, should swiftly counterbalance the effects of the Fed’s hawkish actions.


Chart 1. Q4 2021 S&P 500 earnings and sales growth and surprises, QoQ

Multi-Asset-simply-put-Growth and surprise-01.svg

Source: Bloomberg, LOIM


Rising US bank loans: a growing concern

We may not be out of the woods just yet, however. Chart 2 takes a closer look at the US banking sector. The left-hand chart shows consumer and corporate loan growth increased by 3% in Q4 2021 QoQ (a 13% annualised jump!). This is the highest growth seen since Q2 2020, which was abnormally inflated by Paycheck Protection Program (PPP)  loans. The earnings guidance from several large US banks also pointed to accelerating trends in 2022. This could be of concern. An acceleration of loan issuance could fuel already high demand. And a further increase in demand could eventually cause inflation to rise further and force the Fed to ramp up its cooling arsenal. In such a scenario, the risk of a “rate shock” would rise and could dampen economic growth and potentially increase the risk of a technical recession. This in turn might nullify the impact of strong earnings.

The right-hand chart in Chart 2 confirms these effects by highlighting the positive correlation between the YoY US inflation with loan growth (proxied by US consumer and corporate loans variation as a ratio to GDP). Historically, estimates show that an additional 3% in loans as a percentage of GDP has previously caused rather elevated inflation a year later. It is also essential to keep in mind that this effect can be exponential.  As banks issue more credit, inflation rises and the Fed is likely to scrutinise this phenomenon.


Chart 2. 

Multi-Asset-simply-put-Loan growth-01.svg

Source: Bloomberg, LOIM


Simply put, the Fed might accelerate tightening if bank loans continue to increase, amplifying 2022’s key risk – that of a monetary policy mistake.



[1] See Simply Put “Not All Market Myths Are Valid: Which Could Shape 2022?”


Nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for World growth, World inflation surprises and World monetary policy surprises are designed to keep track of the latest macro drivers making markets tick.

These indicators currently point to:

  • Solid growth worldwide, with stronger momentum in the Eurozone, while China lags. Emerging data continues to show signs of stabilisation.
  • Inflation surprises are more likely to be positive. They however have started to recede and are currently continuing on that trend.
  • Monetary policy is set to remain on the hawkish side, except in China. The risk of a positive monetary policy surprise is significant in the Eurozone and in the US. 


World growth nowcaster

Multi-Asset-simply-put-Growth nowcaster-01.svg

World inflation nowcaster

Multi-Asset-simply-put-Inflation nowcaster-01.svg

World monetary policy nowcaster

Multi-Asset-simply-put-Policy nowcaster-01.svg

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).


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