Progress toward normalization in lending practices generally halted in the first quarter as the Federal Reserve turned more hawkish amid the rebound in inflation, according to data in a Fed report released on Monday.
The Senior Loan Officer Opinion Survey on Bank Lending Practices showed that demand for commercial, industrial and consumer loans declined at a slightly faster rate, reversing the improving trend that occurred in the second half of last year. At the same time, lending standards for industrial and commercial loans were tighter in the first quarter.
However, the real estate market was a bright spot, with all indicators showing improvement in the quarter. With interest rates most likely at their peak in this cycle, the real estate market has been rebounding from its bottom in the past couple of months. Also, buyers are gradually becoming more accustomed to the fact that interest rates, especially mortgage rates, won’t return to pre-pandemic levels anytime soon, so they are feeling less inclined to delay their purchases further.
With the recent April payroll report showing a cooler labor market than expected and housing disinflation likely to appear in the summer, we anticipate financial conditions easing significantly in the coming quarters as the market and the Fed recalibrate their rate paths once more.
More likely than not, the overall unencouraging first-quarter data will be short-lived. Still, that highlighted how fast inflation—and the implications of the Fed’s resulting decision—did filter through the financial market.
It is a recipe for more market volatility, which at the end of the day is also one of the Fed’s mandates to stabilize the financial market. Ultimately, that is always going to be a problem if the Fed continues to be highly data-dependent as it has showed.
