Surging bank lending could rekindle inflation risks, SocGen's Albert Edwards warns

[Love old senior couple looking at growth stack coins graph chart with red ladder.]
Pla2na

Federal Reserve officials may be underestimating the significance of a recent surge in U.S. money supply and bank lending, according to Société Générale strategist Albert Edwards, who said expanding liquidity could eventually fuel inflation and asset-price excesses.

In a note published Wednesday, Edwards challenged a 2021 remark by former Federal Reserve Chair Jerome Powell that growth in the M2 money supply "doesn't really have important implications for the economic outlook," calling it one of the most misguided statements made by a central banker in recent decades.

While Edwards said he doesn’t consider himself a strict monetarist, he said money supply growth and bank lending remain important indicators of future economic activity and inflation.

LENDING SURGE RAISES QUESTIONS

The strategist highlighted comments from veteran bond investor Lacy Hunt, who contends that the Fed's recent Treasury bill purchases are injecting liquidity into the banking system in ways that are already supporting credit growth.

According to Edwards, U.S. commercial bank lending has accelerated sharply in recent months. Hunt argues that rather than sitting idle on bank balance sheets, liquidity created by the Fed's purchases has been deployed into loans and leases, which have been growing at nearly a 10% annualized pace, while commercial and industrial lending has approached 20%.

Hunt believes the liquidity impulse may be helping finance the ongoing boom in artificial intelligence-related investment, a theme Edwards said deserves attention from investors.

ECHOES OF THE 2019 'NOT-QE' ERA

Edwards noted that some market liquidity specialists see parallels with the Fed's actions in 2019, when officials halted quantitative tightening and began intervening in repo and Treasury bill markets while insisting they had not resumed quantitative easing.

That episode became known among critics as "not-QE QE."

Today, similar concerns are emerging as the Treasury increasingly relies on short-term Treasury bill issuance to finance growing deficits. Edwards argued that the strategy is forcing the Fed to provide liquidity at the short end of the yield curve whenever markets become strained.

To Edwards, the development reflects what economists describe as fiscal dominance, a situation in which monetary policy becomes increasingly influenced by government borrowing needs.

"The world’s largest borrower is increasingly financing long-term fiscal obligations with instruments that mature in a matter of months," Edwards wrote, citing research from DoubleLine.

TREASURY BILL ISSUANCE REACHES HISTORIC LEVELS

One chart highlighted in the report showed that nearly 70% of U.S. fixed-income issuance during the past year came from Treasury bills rather than longer-term notes and bonds. Another indicated that Treasury bills now represent a larger share of outstanding government debt than recommended by the Treasury Borrowing Advisory Committee.

Edwards suggested the trend resembles financing practices often associated with emerging-market governments facing funding pressures, though he stopped short of predicting an imminent crisis.

The growing use of short-term debt lowers borrowing costs today but increases refinancing risks in the future, he said.

INFLATION DEBATE RETURNS

The strategist argued that the recent acceleration in money supply growth may carry greater significance than many policymakers believe.

During the years following the 2008 financial crisis, quantitative easing largely remained within the financial system because households, businesses and banks were focused on repairing balance sheets. As a result, much of the liquidity boosted asset prices rather than consumer inflation.

Today, Edwards said conditions are different. The private sector is generally healthier, lending is expanding and broad money aggregates are accelerating. Those developments would likely concern economists who subscribe to the view that inflation is fundamentally tied to money growth.

He also pointed to historical parallels with the 1970s, noting that broad money supply growth accelerated before both major oil-price shocks. In his view, rising energy prices combined with rapid monetary expansion could create inflationary pressures similar to those seen during that decade.

DEFENSIVE ASSET ALLOCATION REMAINS IN PLACE

Despite the discussion of monetary expansion, Edwards remains cautious on risk assets. Société Générale's model asset allocation continues to favor bonds over equities, with a 50% weighting in bonds, 30% in equities and 20% in cash.

For investors, the note serves as a reminder that the debate over money supply, long dismissed by many policymakers, may be returning as bank lending accelerates and government borrowing increasingly relies on short-term financing. Whether those developments ultimately lead to higher inflation remains uncertain, but Edwards argues they deserve far more attention than they currently receive.

MORE ON TIANRONG INTERNET PRODUCTS AND SERVICES, INC., UNITED STATES 30-YEAR BOND YIELD, ETC.

* What Might The Federal Reserve Decide After May 2026's Job Report? [https://seekingalpha.com/article/4910230-what-might-federal-reserve-decide-after-may-2026-job-report]
* Fed Returns To Profitability In First Quarter As Deferred Asset Declines [https://seekingalpha.com/article/4909215-fed-returns-to-profitability-in-first-quarter-as-deferred-asset-declines]
* S&P 500: 20% Moves Up And Down During Next 6-12 Months Very Likely. Here's Why [https://seekingalpha.com/article/4908490-s-and-p-500-20-percent-moves-up-and-down-during-next-6-12-months-very-likely-heres-my-why]
* Fed inflation debate intensifies as alternative gauge signals cooling prices [https://seekingalpha.com/news/4598692-fed-inflation-debate-intensifies-as-alternative-gauge-signals-cooling-prices]
* Bond bulls return: Treasuries are on pace for the strongest week since the start of the war [https://seekingalpha.com/news/4598499-bond-bulls-return-treasuries-are-on-pace-for-strongest-week-since-the-start-of-the-war]