The release of the Fed Senior Loan Officer Opinion Survey early next week could provide valuable insights into the Federal Reserve’s future decision on interest rates.
Expected to be published at 2 p.m. Eastern time on Monday, this quarterly assessment of banks’ lending practices offers policymakers on the Federal Open Market Committee an exclusive preview of the results.
In light of Wednesday’s announcement of the 11th interest-rate hike since March of last year, Chair Jerome Powell highlighted that banks exhibited greater caution when granting loans in the second quarter compared to the first. The critical question now is the extent to which lenders have tightened their lending standards.
This matters because reduced availability of credit from banks can have a similar impact to central bank interest rate increases. It becomes more challenging or expensive for families and businesses to secure loans, thus putting a damper on demand for goods and services. In essence, Fed rate hikes are intended to achieve the same objective.
Should the survey indicate a considerable credit contraction, it would strengthen expectations that the Fed might maintain interest rates at their current level during its September meeting rather than raising them to combat inflation. On the other hand, a less severe credit contraction could suggest that the spring’s banking mini-crisis had minimal impact on loan standards, which would bode well for economic growth. As noted by Deutsche Bank strategist Matthew Raskin and his team on July 18, “A key feature shaping our U.S. rates outlook is an expectation that tighter bank lending standards will lead to a slowdown in growth.”
Notably, bank credit standards have progressively tightened since hitting a low point in 2021. The Fed’s first-quarter report from May revealed that 46% of the 84 banks surveyed had increased lending terms for commercial and industrial loans targeting large and middle-market firms, compared to none in the same quarter the previous year. Furthermore, the fourth-quarter report of 2022, released in February prior to the collapse of regional lenders like Silicon Valley Bank, showcased that 44.8% of banks had tightened their standards.
The forthcoming data from the Fed Senior Loan Officer Opinion Survey promises to shed light on the potential trajectory of interest rates and their implications for the lending landscape. This information will undoubtedly be closely monitored by economists, investors, and market participants alike.
The Impact of Lending Standards on the Economy
The Dallas Fed Banking Conditions Survey indicates that loan demand has experienced a consistent decline for the seventh consecutive month in June.
Economists and strategists have been closely examining how changes in lending standards can affect the overall economy. Citigroup found that a 10-point tightening in credit standards could potentially lower the gross domestic product (GDP) by up to 0.5% within a span of approximately two years. This suggests that the tightening observed over the past year may have caused the level of real GDP to be 2.5% lower than what it could have been otherwise.
In a recent note, Jan Hatzius from Goldman Sachs stated that he expects tighter credit conditions to subtract 0.4 percentage points from fourth-quarter GDP growth. He believes that although tighter credit can be beneficial in curbing inflation, it should not significantly impede demand growth, allowing supply to catch up.
Despite concerns over tightening credit conditions, the economy continues to display robust performance. In the second quarter, GDP grew at an annual rate of 2.4%, increasing from 2% in the previous quarter. Consumer spending remains resilient, with data released on Friday showing a 0.5% increase in personal spending during June. After adjusting for inflation, this marks the largest monthly surge since the beginning of the year.
According to Citi global economist Robert Sockin, the surprising resilience of the U.S. economy is good news. He notes that certain areas of lending, such as various consumer-focused loans, have fared better than expected.
Looking ahead, it is crucial to monitor inflation readings for July and August, as well as nonfarm employment data for both months. The July jobs figures will be released on Friday, and the next FOMC meeting will take place on September 19-20.
