By Safiyah Riddle
(Reuters) - Weakening loan growth for U.S. banks and what top lending officers across the industry have to say about the credit outlook will color the debate U.S. Federal Reserve officials are having over where they push policy from here.
Fed officials are broadly expected to raise their policy rate on Wednesday, but whether that is their last increase or they feel more may be needed hinges on a range of factors they see as influencing the direction of inflation. Just how freely credit is flowing - and is likely to flow in the near term - is a key input.
A valuable guide to that is the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), a quarterly survey of commercial banks that Fed officials consider as they debate policy moves. The central bank has raised interest rates by 500 basis points since March 2022, intentionally weakening demand for loans that help fuel consumption and thus into inflation.
Banking data is important in the context of the muddled economic outlook overall: The Fed's preferred measure of inflation has come down to 3.8% as of May from 7% in June 2022, but a persistently tight labor market and robust consumer spending have led some economists to argue that the economy is still too strong to bring prices down to the 2% target the Fed aims to achieve.
Here's a snapshot of what the previous SLOOS released in May said about the state of credit, as well as other banking data published weekly by the Fed.
THE SLOOS
Even before the collapse of Silicon Valley Bank in mid-March triggered upheaval across the banking sector, demand for credit had already started to weaken - but not evenly.
The Fed's SLOOS splits credit demand into several main categories, including firms of varying sizes for commercial and industrial loans, commercial and residential real estate and other consumer loans such as credit cards and auto loans.
Demand for commercial real estate loans plummeted as remote work diminished the value of office space. Similarly, loan demand from firms of all sizes fell amid rising interest rates.
By contrast, demand for credit card lending dropped more modestly, propped up by robust consumer spending and healthy household balance sheets.
At the same time, banks tightened credit standards across all categories but placed the most stringent restrictions on loans to the increasingly risky commercial real estate sector.
WEEKLY LENDING DATA
More timely data on how the credit conditions described in the latest SLOOS - conducted from late March to early April - are playing out closer to real time are published weekly by the Fed. That data suggests credit tightening continued - and in some cases increased - through the second quarter.
That shows, for instance, that annual growth in credit from U.S. banks looks likely to turn negative before long and is already at a decade low. Overall credit provided by U.S. banks is divided by the Fed into two broad buckets, securities and loans.
Securities, which includes bonds and other financial assets held on banks' balance sheets, have fallen by more than 10% on a year-over-year basis, the fastest rate ever. A substantial part of that is due to the value of those securities taking a big hit from the Fed's rate hikes because as rates go up, bond prices fall.
Growth in loans are faring better by comparison, but are showing some signs of weakness too: Representing 70% of the banking system's overall balance sheet, growth rates are near the historical averages but are also on the decline across all categories.
A regional survey released by the Dallas Fed in June supported these challenging conditions, finding that most banks in the district expected further deterioration in the coming months.
The four largest banks in the U.S. reported better-than-expected second quarter earnings in July, as increased income from loans still outpaced the payouts from deposits, but analysts cautioned that weakening demand for loans could jeopardize net interest margins.