The Flow of Funds report from the Federal Reserve came out today for the 4th quarter of 2014. Non-financial business debt grew quite fast.
“Non-financial business debt rose at an annual rate of 7.2 percent in the fourth quarter, a somewhat larger increase than in the previous quarter. As in recent years, corporate bonds accounted for most of the increase.” (page i of report)
The non-financial business debt had grown at an average a little over 5% for the previous 4 quarters.
We may be seeing an increase in lending ahead of the somewhat anticipated Fed rate rise. Will these funds be invested in domestic productive capacity, purchases of existing assets or held for a rainy day?
Still, a benefit from the Fed signaling a future rate rise is that businesses tend to increase borrowing ahead of time. Normalizing monetary policy gives increasing incentives for investment now rather than later. Normalizing monetary policy can be stimulative when there is confidence that the business cycle will continue for a couple of years.
How confident are businesses?
How confident are businesses that the business cycle will last another 2 years? Do businesses believe that the Fed rate is far behind the curve of the business cycle? The answer will be found in how they use the funds.