Friday, October 30, 2015

Net Interest Margin Signaling Economic Weakness........ANOTHER PESKY FACT!

Net Interest Margin Signaling Economic Weakness

Positive rate spreads have been continuously identified as a sign the economy is not entering a recessionary environment. But given the artificial suppression of interest rates at the long-end of the curve, could rate spreads be misleading this time.

In a world of zero interest rate policy, NIM may be a more valid indicator of future economic activity.

In other words, economic forecasts based on the shape of the traditional curve may not be as relevant given the unprecedented monetary policy actions of the Fed.

Very low levels of interest rates are squeezing bank profits which is one of the key drivers of lending activity and a primary determinant of economic activity.Growth of the U.S. economy, even at today's below trend pace, is more dependent than ever on a continuation of credit growth.

If bank lending activity is challenged as a result of declining NIM, it would stand to reason that NIM may serve as a useful indicator of potential economic weakness.

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