The Federal Reserve released its Senior Loan Officer Opinion Survey this week. The quarterly survey report found that banks have tightened their credit standards for lending. Meanwhile, consumer loan demand has weakened, as interest rates have risen as part of the Fed’s anti-inflation efforts.
Reuters reported that the news is likely to be seen as evidence that the nation’s financial activity is slowing. The Federal Reserve has consistently suggested that a cooling of the economy is needed to help fully reverse rising prices. The survey also reported that banks expect even tighter credit and lending standards throughout the remainder of the year.
Higher rates, tighter credit, and weaker loan demand
Since the current streak of Fed rate hikes began in March 2022, the central bank has raisedinterest rates by 5.25%. Banks have reacted to rising rates by increasing their own lending standards. As the Fed notes in its survey, there are several reasons for that reaction:
“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 CRE (commercial real estate) and other loans.”
According to the survey, a majority of respondent banks have tightened their credit standards for commercial and industrial business loans. On the loan demand side, there is continuing weakness, though credit demand has reportedly improved since the first quarter.
A slowing economy ahead?
Many policy experts at the Fed had noted their concern about an overreaction in tightening. The latest survey suggests that such an overreaction has not occurred. However, as JPMorgan economist Daniel Silver pointed out, the possibility of a serious economic slowdown remains strong. Continued tightening of credit and reduced loan demand could still lead to a recession sometime later this year or early in 2024.