September 19, 2022
Typically when the economy starts to weaken the demand for bank loans declines and banks tighten their loan standards. Another indicator that we are likely not in a recession just yet is that demand for bank loans remains generally strong and bank credit continues to expand. However, banks have begun to tighten their lending standards which has historically portended an imminent turn in the credit cycle.
Bank lending is one of the main transmission mechanisms by which monetary policy influences the economy. As the Fed continues to raise interest rates, a reduction in the growth of bank credit is to be expected. And with inflation remaining stubbornly high, the Fed is unlikely to stop tightening policy until both bank loan demand and supply are affected.