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Tightening Credit: Growing Concerns for US Economy as Banks Restrict Loan Access

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A recent survey from the Federal Reserve reveals that an increasing number of American banks are tightening their lending standards, making it harder for both consumers and companies to secure loans. This trend could pose potential challenges to the U.S. economy. As banks become more cautious in extending credit, obtaining loans becomes more expensive for households and businesses. Simultaneously, the demand for loans has decreased significantly.

The tightening of credit is a consequence of the Federal Reserve’s aggressive interest rate hikes, which were implemented to cool down the economy and combat inflation. According to the survey, around 51% of banks have tightened lending standards for medium and larger businesses in the past three months, showing the highest net share of banks reporting such tightening since the 2008 financial crisis.

For small firms, about 50% of banks reported tightened lending standards, and for consumers, a higher number of banks toughened credit card loan standards (36%). Although fewer banks reported tightening standards for auto loans compared to the previous quarter, it still remains relatively high, dating back to 2011 (excluding the pandemic).

Federal Reserve Chair Jerome Powell expressed concerns about the headwinds the economy faces due to tighter credit conditions for households and businesses. He attributed this tightening to factors such as a less favorable or uncertain economic outlook and reduced risk tolerance, as cited by surveyed banks.

Additionally, banks are witnessing reduced demand for loans, with the net share of banks reporting strong loan demand from mid-sized and large firms remaining among the lowest since the 2008 financial crisis, albeit with a slight increase during Q2.

Overall, these survey results indicate that businesses now face higher hurdles in obtaining loans for equipment purchases or hiring, and everyday Americans may find it more difficult to get loans for purchases, which could have ripple effects on the companies that sell these goods. As the economy has shown signs of cooling, the tightening of credit conditions may further impact economic activity, hiring, and inflation.

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