"By tapering its QE
purchases, the Fed is reacting to a decline in the banking system's demand for
bank reserves, because the growth of savings deposits has been decelerating for
the past two years. In fact, in the past three months savings deposits at U.S.
banks have only grown at a mere 1.4% annualized pace, and they have not grown
at all since the Fed started tapering its QE purchases in early January. For
most of the past several years, the Fed's QE bond purchases served mainly to
accommodate the public's seemingly insatiable demand for safe, short-term
savings deposits. That's changed significantly in the past few months, however.
The private sector is no longer so risk-averse, and banks are apparently also
less risk-averse; that would explain why loan volume is expanding and savings
deposit inflows have come to a virtual halt. The slowdown in deposit growth and
the increase in bank lending are both signs of a return of confidence. The
return of confidence is the Fed's worst nightmare."
