The bank warns of intensifying pressure on the US economy condition

The bank warns of intensifying pressure on the US economy  condition

The Federal Reserve’s survey of senior loan officers shows that banks have tightened lending standards further while households and businesses remain wary of taking out additional borrowing. Given how important credit flow is to the US economy, it increases the likelihood that the economy will continue to slow, helping to bring inflation back on target.

Banks are tightening lending conditions in all areas

The Fed last raised its target range for Fed funds in July, and with mortgage and auto loan rates soaring above 8% and credit card borrowing costs at record levels, officials now view monetary policy as “restrained.” But it is important to remember that it is not just the cost of borrowing that suppresses activity, restricting access to credit also has a significant dampening effect on the economy. Today’s Fed Senior Loan Officers’ Survey (SLOOS) underscores how tightening lending conditions will continue to dampen activity and contribute to a sustained return of inflation to target.

Banks tightened lending standards during the third quarter and saw further weakness in loan demand across the board. The net percentage of banks tightening lending standards for medium and large companies reached 33.9% in the third quarter, compared to 50.8% in the second quarter. Importantly, these are incremental changes – we have to remember that the 33.9% is more than the 50.8% that banks tightened in the second quarter. Thus, the wording of the report states, “Survey respondents, in general, reported tougher standards and weaker demand for commercial and industrial loans for businesses of all sizes during the third quarter. Furthermore, banks reported tougher standards and weaker demand for commercial and industrial loans.” “. All categories of Commercial Real Estate (CRE) loans. Likewise, for household lending “lending standards have tightened across all residential mortgage (RRE) loan categories… Additionally, banks have reported tougher standards and weak demand for home equity lines of credit (HELOCs). Moreover, for credit cards Standards for auto and other consumer loans have reportedly tightened, and demand has generally weakened.

Banks’ tightening of lending standards indicates that premium bank lending has turned negative

Source: Macrobond, NJ

The chart above shows the relationship between the proportion of banks tightening lending standards for businesses and total bank lending in the US economy. I have used corporate lending standards as a proxy for overall lending sentiment and continue to suggest that bank lending in aggregate turns negative over the next two quarters. Whenever this happens there is a recession. The chart below shows how the weakness also increased demand for loans, underscoring the possibility that lending growth could turn negative in the US.

Demand for loans also continues to shrink

Source: Macrobond, NJ

Credit stress increases the chances of a more severe slowdown

The reasons that prompted banks to tighten lending standards included “less favorable or more uncertain economic outlook; economic outlook is not encouraging.” Low risk tolerance; deterioration in the credit quality of loans; Concerns about financing costs; deterioration in the values ​​of customer guarantees; concerns about the adverse effects of legislative changes, supervisory actions or changes in accounting standards; Concerns about deposit outflows; And a deterioration or desire to improve their liquidity conditions.” Regarding small banks, which were the focus of market concerns in March/April after some high-profile failures, they focused more on “deposit outflows, funding costs, deterioration or desire to improve their liquidity positions, and concerns about declines in liquidity.” Market value of fixed income assets as reasons for tightening lending standards.”

This report makes it likely that the Fed will not need to raise interest rates further since tighter lending conditions and lower demand for loans indicate credit contraction that will inevitably worsen the economy. Markets currently expect monetary policy tightening of around 2 basis points at the December FOMC meeting, and a cumulative 4 basis points by the January FOMC meeting. This seems fair to us to see, but given the importance of credit flow to the US economy, we fear that optimism about a potential “soft landing” is misplaced with the Fed likely needing to reverse course and start cutting interest rates more aggressively than now. . reasonable prices. We see over 150 basis points of interest rate cuts in 2024 versus market rates of around 90 basis points.