Fed Suggests Inflation Will Slow as US Banks Tighten Credit Condition
The United States Federal Reserve’s banking report released Monday came in just as expected. Lenders tightened credit conditions in the first quarter and expect to continue doing so throughout the year, the Senior Loan Officer Opinion Survey showed.
Demand for loans is weakening. That’s what five percentage points of interest-rate increases within about a year — the most aggressive campaign in a generation — will do to banks.
Arguably, it could have painted a far worse picture, given that higher rates were one of the driving forces behind the collapse of Silicon Valley Bank and First Republic.
Unfortunately, the fact that banks are tightening conditions along with the Fed doesn’t say a lot about how much further interest rates will rise. For what it’s worth, Goldman Sachs strategists on Monday argued that the Fed won’t cut rates as much as markets expect later this year.
Traders are beginning to think the Fed will hike rates again in June, according to the CME FedWatch tool. Odds are now at 17% for another move, compared with a 0% chance a week ago.
After that, who knows — inflation data for April are due out Wednesday. Even if they are cooler than expected, they’re very likely to still be too hot for the Fed.
It’s also not clear how badly tighter credit conditions are hurting the economy. Chicago Fed President Austan Goolsbee said Monday he’s “getting vibes” that a credit squeeze is beginning. That doesn’t sound too serious, yet.
Across the Atlantic, European Central Bank President Christine Lagarde last week appeared alarmed that demand for loans had weakened the most since the 2008-09 financial crisis.
Growth, for now, is nevertheless holding up better than expected. And the ECB is expected to keep raising interest rates next month as well. The Bank of England announces its latest decision Thursday.
There will come a point when it will be clear that central banks have done enough to rein in inflation. #Fed Suggests Inflation Will Slow as US Banks Tighten Credit Condition
