ORLANDO, Fla., May 5 (Reuters) – The gulf between financial markets and Federal Reserve Chair Jerome Powell’s views on the US economy could not be wider, but two national credit conditions and credit surveys within 24 hours could narrow the gap.
The Fed releases its quarterly Senior Loan Officer Opinion or “SLOOS” survey on Monday, May 8, and the National Federation of Independent Business’ April survey of small businesses is released the following day.
They come at a critical time – after raising interest rates by 500 basis points in just over a year, the turmoil in the US regional banking sector is deepening and claiming more victims.
Lending standards, already at levels comparable to previous recessions, according to multiple indicators in the latest SLOOS and NFIB surveys, are only getting tighter.
The question is how much more – enough to actually plunge the economy into recession and force the Fed to cut rates in the second half of the year as futures markets aggressively price? Or not?
Powell and his colleagues saw the SLOOS report. After the Fed hiked rates to a 16-year high on Wednesday, Powell told reporters that it was “broadly consistent” with the recent tightening of lending standards and will show that “credit has continued to grow, but the pace has slowed since the second half of last year.”
Although tighter credit conditions will weigh on economic activity, hiring and inflation, a recession can still be avoided. “It’s possible that this time is really different. The case of avoiding a recession is more likely than having a recession in my view,” Powell said.
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SCREAM CALIFORNIA
However, if US interest rate futures are the barometer, financial markets could no longer disagree. Secured overnight financing rate (SOFR) futures on Thursday priced in up to 100 basis points of easing by year-end, and fed funds futures suggested the first cut could come as early as July.
That would be a quick turning point for rate cuts from rate hikes, but not uncommon. In fact, it would be in line with historical trends – according to SMBC Nikko Securities’ Joe Lavorgna, the median pivot over the last 18 tightening cycles since the 1950s is two months and the average is three.
It remains to be seen whether the Fed will turn around so quickly this time. As Powell pointed out, inflation remains well above its 2% target and the labor market is surprisingly resilient.
But weaker credit and banking conditions will take their toll.
“We are in the midst of a full-blown California banking crisis,” wrote Phil Suttle, founder of consulting firm Suttle Economics, on Thursday. “The resulting nationwide headwinds from bank lending … will push the economy into recession by year-end,” allowing the Fed to cut rates to 3% by the end of next year, he said.
RECESSION WATCH
The Fed’s latest SLOOS in February showed that the net percentage of banks reporting tightening in commercial and industrial lending standards in the fourth quarter rose to over 40%.
This is consistent with levels reached before or during the last four recessions – 1990-91, 2001, 2007-09 and early 2020. Similarly, demand for these loans has also collapsed to levels seen in previous recessions.
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Meanwhile, the latest NFIB survey showed that small business credit conditions, as measured by the Credit Availability Index compared to three months ago, deteriorated sharply, reaching their worst reading in over a decade.
That index’s four-point rise to 9 since February — higher pressure means credit is harder to access — was its biggest monthly rise in over 20 years. It will be closely monitored on Tuesday.
A separate NFIB bank survey released this week shows small business owners are not yet hitting the panic button, but concerns are growing.
Asked last month how concerned they are about the health of the bank they use for business purposes given the recent bank failures, 19% answered “very concerned”, 23% “moderately concerned” and 28% “slightly concerned”.
“Small business owners are unsurprisingly concerned about the stability of the banking system. A strong small business banking system is essential for small business owners to operate and grow their business,” said Holly Wade, executive director of the NFIB Research Center.
Perhaps the most ominous signal from the NFIB Banking Survey released this week was that more than half of small business owners – 55% – believe the United States is already in a recession.
That’s certainly not what Jerome Powell thinks.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Related columns:
– Small US banks and companies cause big problems
– The US money supply is falling at its fastest rate since the 1930s
– Inequality and “deposit glut” led to banking instability
By Jamie McGeever; Edited by Emelia Sithole-Matarise
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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.
Jamie McGeever
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