As these two charts show, bank lending to small- and medium-sized businesses has been booming for the past several years. But it got a kick-start early this year, right around the time the Fed started tapering its QE3 program. In earlier posts this year I've noted that the increase in bank lending was a good sign that the Fed was correct to begin tapering QE3, because the banks were regaining their confidence and the demand for safe, cash-equivalent assets was declining. Bank savings deposit growth, for example, has declined to a 4% annualized rate in the past three months. A few years ago, savings deposits were growing at strong, double-digit rates.
As confidence rises and the demand for money declines, the need for an actual tightening of monetary policy (tapering is not tightening, it's just a lessening of the degree of ease) increases.
I sense there is pressure building up with 5-yr and 10-yr Treasuries yields at a measly 1.7% and 2.3%, respectively. The bond market should be anticipating more in the way of an eventual Fed tightening, especially if these trends continue. Otherwise, there will be a growing imbalance between the supply of money and the demand for money (i.e., too much money relative to the demand for it), and that is the stuff of which higher inflation is made.
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