Snap Chart: Credit Expansion and Inflation

Markets are facing abnormal dynamics. With COVID-19 forcing businesses to close, this has increased the demand for short term borrowing to cover near-term liquidity concerns. Similar to the bull market run since 2009, despite interest rates hovering around 0% and ample liquidity provided by the Federal Reserve (Fed), we do not currently expect inflation.

Fortunately, U.S. banks entered this crisis in a strong position. Thus, while they are needing to provision and are likely to take large write downs, following substantial assistance by the Fed, there is currently a large amount of lending activity occurring. This reflects the greater acceptance of risk since the Fed provided support for corporate debt markets. The higher level of lending activity may lead to concerns about inflation. But we believe the inflation fears are overblown as the high level of corporate debt issuance that we have seen YTD is typically about survival rather than corporate expansion. As such, this credit expansion is unlikely to be inflationary.