By Michael S. Derby
(Reuters) – Credit data likely to be considered at a two-day Federal Reserve policy meeting that begins on Tuesday may show pumps primed for increased bank lending, even as the prospect for gains is complicated by a highly uncertain economic environment and still-daunting borrowing costs tied to central bank policy.
Fed officials are almost certain to leave the U.S. central bank’s benchmark interest rate steady in the 4.25%-4.50% range on Wednesday as they start weighing how the Trump administration’s economic agenda may affect sticky inflation and solid growth trends.
Understanding the state of bank lending is key in that effort. Bank chiefs have been gushing about the outlook as President Donald Trump took office for a second time this month, but Fed officials this week will see if loan officer survey results show that optimism is shared by the bank officials closest to the front lines of lending.
While the lighter regulatory touch Trump promises on both financial institutions and businesses could set the stage for boosted borrowing and lending, still-expensive borrowing costs tied to sturdy levels of inflation may dampen demand for credit. At the same time, Trump’s agenda of aggressive trade tariffs and deportation of undocumented workers is generating huge levels of uncertainty.
The clouds are so thick that New York Fed President John Williams said earlier this month he was unable to provide guidance on interest rate policy because of the unsettled government policy environment.
Trump’s arrival in the White House “with a pretty heavy deregulatory framework” has made bankers “absolutely giddy” at the thought of being able to lend more easily amid what they see as a strong economy, said Joseph Brusuelas, chief economist at RSM US LLP.
Nancy Lazar, chief global economist at Piper Sandler, meanwhile cautioned that while lending will rise, policy and economic headwinds mean “it’s probably not going to be a boom of a credit cycle.”
Banks have already been sitting on stagnant levels of commercial and industrial loans, although the overall level of lending for many parts of the credit world has been rising.
LOOSER STANDARDS
Brusuelas and Lazar expect this new landscape will be defined by loosening lending standards of the sort that had already been showing up in the Fed’s Senior Loan Officer Opinion Survey, last released in November. The newest vintage of the survey is expected to be presented to Fed officials at this week’s meeting and released to the public on Monday.
The survey “is going to show a very clear easing … of lending standards,” Lazar predicted.
The lending outlook has also been helped by changes in some bond dynamics, as the so-called yield curve reassumed a more typical posture, with longer-dated securities once again offering higher yields than shorter-dated ones.
“The disinversion of the yield curve in the past few months is a meaningful boon to how banks make money,” and will help facilitate bank lending amid an ongoing trend of easing standards that pre-dated Trump’s return, said Lauren Goodwin, an economist and the chief market strategist at New York Life Investments.
An uptick in bank lending and credit demand is notable, as it is happening well within an ongoing economic expansion rather than at the start of a new cycle.
“We’re not early cycle because we never had a recession, but we are at the early stages of banks increasing lending and starting to increase lending, potentially more aggressively,” Lazar said. “There are risks associated with that. I would think the near-term risk is inflation,” as expanded borrowing puts more pressure on inflation still running above the Fed’s 2% target.
HEADWINDS FOR BORROWING
And it’s the inflation environment that continues to be one of the reasons why banks may not be able to expand lending even if they want to.
After lowering its overnight target rate by a full percentage point last year, the Fed has pulled back on expectations of rate cuts in 2025 amid a view that inflation will remain above target this year. Higher borrowing costs will almost certainly restrain the mortgage industry and complicate who can borrow, both in the consumer and business spheres.
“Because of elevated interest rates, companies with pristine balance sheets will tend to be able to take the risk” to borrow more, while “small and mid-sized firms who are often self-financed won’t be in the position” to take advantage of more available credit, Brusuelas said. “It will fuel a sense of grievance that the small companies are being left behind.”
Economists also see diverging prospects for lending in the consumer sector. High-end consumers probably will be in a good position, while lower-income households are likely to continue to show some signs of fraying, as shown by recent Fed data.
The U.S. has “a truly bifurcated economy in terms of demand for credit,” Goodwin said.
The Philadelphia Fed said last week that credit card delinquency rates, while still low, had climbed in the third quarter of 2024 and were double the lows seen during the COVID-19 pandemic, when households were flush with savings.
(Reporting by Michael S. Derby; Editing by Paul Simao)
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