According to the latest Federal Reserve survey data released on Monday, U.S. banks have tightened credit standards and experienced weaker loan demand from businesses and consumers in the second quarter. This indicates that the Federal Reserve’s campaign to raise interest rates is effectively slowing down the nation’s financial gears. The survey, known as the Senior Loan Officer Opinion Survey (SLOOS), also reveals that banks plan to further tighten lending standards for the remainder of 2023.
The Fed stated, “The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of commercial real estate and other loans.”
Since March 2022, the Fed has increased interest rates by 5.25 percentage points, prompting banks to reduce their lending activities. The latest SLOOS report, which was available to Fed policymakers last week before their decision to raise interest rates for the 11th time, suggests that credit tightening is an ongoing process.
Fed Chair Jerome Powell commented on the survey results, saying, “You’ve got lending conditions tight and getting a little tighter, you’ve got weak demand, and… it gives a picture of a pretty tight credit conditions in the economy.”
However, the report does not indicate a rush to tighten credit to the extent that some policymakers had feared after the banking turmoil in March. This alleviates concerns about further policy tightening in the future.
Despite this, the significant tightening observed in recent quarters could undermine the Fed’s goal of achieving a “soft-landing” scenario. JPMorgan economist Daniel Silver highlighted that the degree of tightening seen recently is historically significant and has often been associated with recessions. While it does not guarantee a future recession, the tightening suggests that the economy may experience a slowdown.
The survey reveals that last quarter, a net percentage of 50.8% of banks tightened credit terms for commercial and industrial loans to medium and large businesses, while it was 49.2% for small firms. These figures fall short of the levels reached during the peak of the pandemic but mark the largest increases since the Fed’s first-quarter report in 2009 during the Great Financial Crisis.
Loan demand from businesses remained weak, although not as low as reported in the previous survey for the first three months of the year. The latest survey shows a smaller net percentage of banks reporting stronger demand from firms of different sizes.
As for consumer loans, credit terms continued to tighten while demand decreased. However, some categories did show slight improvements compared to the first quarter. For instance, there was a net percentage of -21.8% of banks reporting greater willingness to make consumer installment loans, which is slightly better than the previous period. Although demand for auto loans and credit card loans remained weak, there were signs of stabilization.
In conclusion, the Federal Reserve survey data indicates that U.S. banks are tightening credit standards and experiencing weaker loan demand. The tightening is expected to continue, and while it doesn’t suggest an immediate rush to tighten credit, it raises concerns about the Fed’s desired “soft-landing.” Despite improvements in some categories, credit terms for consumers remain tight, and demand remains weak.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
