No surprise came from the third-quarter Senior Loan Officer Opinion Survey on Monday as most major indicators pointed to improvement in lending sentiment. The improvement was likely a direct result of the Federal Reserve’s rate pause in September as the central bank began to rebalance its policy to a less hawkish stance.
Given the more recent pause in November, we think that the Fed is likely done hiking rates, and we expect credit standards to loosen further. That, however, does not mean financial conditions are unrestrictive.
Credit standards are still far from neutral. The indexes for tightening standards fell to 33.9 from 50.8 for large/midsized firms, and to 30.4 from 49.2 for small firms. The neutral level is zero, which was also the average in 2019.
Demand growth for loans also remained under water, yet at a slower pace, according to survey respondents. The indexes for demand for commercial and industrial loans were up from -51.6 to -30.5 for large/midsize firms, and fell from -47.5 to -49.1 for small firms.
We might have not reached the bottom in terms of credit demand yet as interest rates stay elevated.
Clearly, further declines in demand for credit instruments are what the Fed is trying to maintain to keep inflation in check.
As inflation remains above the Fed’s target of 2% and the market’s expectations of between 2.5% and 3%, the Fed will continue to keep interest rates at the current level for at least until Q2 2024 in our estimate.
