U.S. Treasury Secretary Janet Yellen Says To Expect Tighter Bank Lending Standards Once The Fed Pauses Rate Hikes
When credit becomes risky during an economic downturn, financial institutions tighten lending standards.
A weakening United States dollar is pushing financial institutions to tighten their lending standards. The recent bank failures in addition to the continuous loss of value by the U.S. dollar results in an increase in inflation and makes lending risky. The news comes as no surprise given that inflation is here to stay at elevated levels, despite somewhat slowing down according to the official data.
In a recent interview, the U.S. Treasury Secretary Janet Yellen said she is expecting banks to tighten lending as the result of recent bank failures. She pointed out that tighter credit would negate the need for the Fed to hike interest rates since it would limit the amount of cash in the economy.
“Banks are likely to become somewhat more cautious in this environment. We already saw some tightening of lending standards in the banking system prior to that episode, and there may be some more to come.”
Tighter lending affects consumer lending as well as small business loans and revolving lines of credit. Not only will credit become harder to get but also it will be more expensive to service as the terms become less favorable.
The Federal Reserve pointed out:
“The supply of bank credit is an important driver of macroeconomic outcomes, with significant implications for employment and output.”
Yellen’s seemingly “casual” announcement should not be underestimated. Based on the Fed’s very own research quoted above, tighter lending will have a significant affect on employment (i.e. unemployment will rise because small businesses will find it harder to meet their payroll needs). In addition to that, production will slow down. If production slows but demand for goods and services does not decline but remains high, prices for those goods and services have no way to go but up.
In the same study, the Federal Reserve concludes:
“Consistent with this measure reflecting the supply of credit, tighter lending conditions are associated with slower growth over the following year and higher interest rates on new originations.”
What, exactly, does tightening credit mean for an average consumer? We’ve already determined that tighter credit means slow economic growth but let’s dig a bit deeper.
From an investment perspective, slower economic growth results in lower profits. If you are an investor or just someone with a retirement account similar to a 401(K), it means that the companies your stock is invested in will see their profits decrease. If corporate profits are slowing or falling, stock prices respond accordingly.
Further, tighter lending standards result in fewer new small businesses. Historically, small businesses have been a significant driver and pushed the American economy forward. Now that cash is becoming less accessible we should expect to see fewer start ups. Again, this will further stall economic growth.
In fact, tighter lending standards will impact all business. This is because a lack of cash will make it more difficult to open new locations, to advertise and to hire, among many other things.
Is there anything consumers can do to adjust to tighter lending standards? As is the case with any macroeconomic events, consumers have no choice but to be reactive rather than proactive. Those of us with good credit history and stable incomes should still be able to take out mortgages, car loans or get new credit cards. However, if your credit has been established recently or isn’t great, you will really need to work much harder to afford the same lifestyle and things you may have grown accustomed to. Consumers with recently established credit or bad credit shouldn’t be surprised if the terms are less than favorable. Having good credit history is becoming increasingly important.
It’s not worth waiting for an “official” announcement. By then it will be too late. Small to mid size banks may have already started to tighten their lending standards because they want to keep their balance sheets healthy and their shareholders happy.
Tighter lending will have an impact on us, our households, businesses and the U.S. economy. It’s by no means an exaggeration. A cooling in bank lending makes a recession even more likely.
I think the tightening in credit will be short lived. I have seen a huge push in CDs with decent rates, decent from the perspective of the last 10 years. They definitely seem to be wanting cash on-hand, but they are going to have to do something to make money on those vehicles. The striking thing for me is the timeframe, 12-18 months. I think I was a kid the last time I saw anything like that.
Regarding the stock price downward pressure, great for me, more good stocks on sale. :) CEOs will always find ways to manipulate the system to ensure their investors get paid.
The one thing I found odd and likely something to get people in trouble is huge inflows into money markets. I think people forgot that in 2008 they were not guaranteed to hold value like a lot of regular people think. Any thoughts on this?
I think the small and regional banks will be consumed by the to big to fail meg Banks ,this way it will be easier to roll out the CBDC's and most of the currencies will be lost to the average person ,that,s what happen in the 1929 crash about six thousand banks went under , just like stories mom pap ,the name of the game is consolidation TOM123