The worst of monetary tightening for the financial market may be behind us, according to the latest quarterly Senior Loan Officer Opinion Survey released by the Federal Reserve on Monday. All indicators have shown significant improvement since the Fed ended its rate hike campaign.
Lending standards have been relaxed, which is helping to stimulate demand. The index for tightening standards for all firms reached the lowest level since July 2022, around the time the Fed began to aggressively increase its interest rates.
Demand still remained under water, yet the pace of slowing was significantly less than the previous four quarters. That was also a result of the spread between loan rates and costs of funds narrowing in January.
This data aligns with our quarterly RSM US Middle Market Business Index, indicating that businesses are gearing up for borrowing and investment, thanks to the strong economy.
But the road to normalization is still expected to be challenging, especially with the possibility of a surprisingly robust year on the horizon. This could result in the Fed being less inclined to lower rates too rapidly. The first rate cut in June remains our base case, with a nontrivial risk of an earlier one in May.
Underneath the top-line figure, for commercial and industrial loans, the improvement was much more impressive than it was for real estate loans. The real estate market remained significantly more restricted from accessing capital amid high mortgage rates that continued to dampen buyers’ demand.
Read more of RSM’s insights on economics and the middle market.