What is the prospect that the Fed’s second round of quantitative easing will not be a misnomer, that is, it will result in a net increase in combined Federal Reserve and commercial banking system credit? Chart 5 shows that in the seven months since the end of QE1, the rate of contraction in other elements of Federal Reserve credit besides outright securities holdings has slowed significantly. In the seven months ended October 2010, these other elements of Federal Reserve credit have contracted by only a net $36 billion. If these other elements of Fed credit continue to contract by only a small amount or stabilize, then the Fed’s planned $600 billion net increase in its outright securities holdings will make almost a dollar-for-dollar increase in total Federal Reserve credit. Chart 6 shows the behavior of commercial banking system credit since the end of QE1 through September 2010, the latest full monthly data available. In the six months ended September 2010, commercial banking system credit contracted by only $47 billion. In each of three months ended September 2010, commercial banking system credit increased. The latest Federal Reserve survey of bank lending practices, which covered the three months ended July 2010, showed a significant increase in the percentage of respondent banks easing their lending standards. The actual recent behavior of commercial banking system credit and the results of the recent Federal Reserve survey of bank lending practices suggest that commercial banking system credit will be a considerably smaller drag on combined Federal Reserve and commercial banking system credit creation or perhaps make a small positive contribution during the second round of Federal Reserve quantitative easing.
