The Federal Reserve last raised the Fed funds target range in July and with mortgage rates and car loans above 8% and credit card borrowing costs at record highs, officials are now regarding monetary policy as “restrictive”. But it is important to remember that it isn’t just the cost of borrowing that acts as a brake on activity, restricting access to credit is also hugely influential in taking heat out of the economy. Today’s Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) underscores how the tightening of lending conditions will continue to put the brakes on activity and contribute to inflation sustainably returning to target.
Banks tightened lending standards through the third quarter and saw further weakening in demand for loans across the board. The net proportion of banks tightening lending standards to medium and large firms came in at 33.9% in 3Q versus 50.8% in 2Q. Importantly these are incremental changes – we need to remember the 33.9% is over and above the 50.8% of banks tightening in 2Q. Consequently, the wording of the report states, “survey respondents, on balance, reported tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter. Furthermore, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories”. Similarly, for lending to households “lending standards tightened across all categories of residential real estate (RRE) loans… In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Moreover, for credit card, auto, and other consumer loans, standards reportedly tightened, and demand weakened on balance”.
