Fed Report Reveals Tighter Credit and Weaker Demand Among US Loan Officers, According to Reuters

By Howard Schneider

WASHINGTON – Banks tightened lending standards for businesses and households in the United States during the third quarter, although the rate of change seemed to moderate. Demand for loans declined broadly, reflecting the influence of rising interest rates on the economy, according to a report from the Federal Reserve.

The tightening of business loan standards affected firms of all sizes, while consumers experienced stricter credit conditions for home and home equity loans, credit cards, and auto loans. The demand for loans saw significant declines, with 60% of banks reporting a moderate or substantial decrease in demand for home mortgages in the third quarter, a notable increase from 43% in the previous quarter. This trend underscores the continuing impact of the Federal Reserve’s aggressive interest rate hikes that began in March 2022, which have weighed heavily on the residential housing market.

The average interest rate for a 30-year fixed-rate mortgage surged during the summer and fall, exceeding 7.7%—a level not reached in almost 25 years.

The survey, which is conducted quarterly by the Federal Reserve and provides critical information for policymakers, indicated that the pace of credit tightening might be slowing as the central bank’s rate increases possibly approach a plateau after nearly 20 months. The Fed has maintained its policy interest rate in the 5.25%-5.50% range since July, leading analysts to believe further increases are unlikely.

While more than half of the banks reported tightening business lending standards in the second quarter, only 35% indicated they did so further in the third quarter, with around 62% keeping their standards unchanged. Some banks also reported a slight easing of standards.

In the third quarter, bankers were less likely to cite concerns about the broader economy or their own banks’ financial health as reasons for tightening standards. Instead, they pointed more often to a decreased risk tolerance and challenges related to reselling loans in the secondary market.

Demand for commercial and industrial loans saw a pronounced decline, particularly among small businesses, with over half of banks indicating a drop in credit demand from firms with annual sales below $50 million. Meanwhile, about 39% of loan officers noted a reduction in loan demand from larger firms, compared to nearly 60% in the second quarter.

For households, 86% of loan officers reported that mortgage standards remained largely unchanged in the third quarter, although 12% indicated a tightening, an increase from just over 5% in the second quarter.

Analysts noted that these survey results aligned with expectations for an economic slowdown in the upcoming months. “The survey continues to show tightening lending standards and decreases in demand across major loan types, suggesting an economy that is likely to slow down,” commented Daniel Silver, an economist at J.P. Morgan.