Loan demand weakens
There is reason for the Federal Reserve to further cut interest rates.
November 12, 2024
The latest Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) showed bank lending standards ranging from unchanged for larger firms to tighter for smaller firms. Demand for loans sagged across the board for commercial and industrial loans (C&I).
For households, lending standards for residential real estate (RRE) were unchanged, while demand for loans remained weak overall. Home buying remains limited by short supply, high rates and low affordability. In the second quarter, a small percentage of banks eased lending standards for the first time in two years but that was short-lived. In the third quarter, the opposite was true as a small percentage of banks tightened standards. Demand and standards for home equity lines of credit (HELOCs) were flat.
There was a slight uptick in the percentage of banks tightening standards for auto loans following an unchanged reading in the second quarter. Auto affordability is a problem for consumers. The trend of banks reporting weak demand goes back to mid-2022.
In consumer credit cards, 18% of banks tightened standards. Credit card demand was stronger than pre-pandemic but unchanged during the third quarter. Banks were more likely to approve credit cards for borrowers with high credit scores; they expect increased spending over the next two quarters.
Banks continued to report tight standards amid weak demand for commercial real estate (CRE) loans. In a glass half full development, one-fifth of respondents reported tighter standards for new loan applications for multifamily properties versus one-third in the first quarter.
Banks listed a more uncertain economic outlook and reduced tolerance for risk as reasons for tightening standards. (The survey was conducted prior to the election.)
Weak loan demand from both consumers and firms was exacerbated by even tighter lending standards.
Ben Shoesmith, KPMG Senior Economist
Bottom Line
Weak loan demand from both consumers and firms was exacerbated by even tighter lending standards. Those shifts provide reason for the Federal Reserve to further cut short-term interest rates by a quarter point at the December meeting. However, we still have two months of inflation data and one month of employment data that could cause the Fed to skip a cut at the next meeting. The Fed will not front-run inflationary policy shifts by the new administration and Congress, as the gap between what is promised on the campaign trail and what is accomplished can be large.
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