(Bloomberg Opinion) — The timing and pace of the Federal Reserve’s interest rate cuts will vex economists and market commentators in the coming months. But what’s new in 2024 is that lenders and borrowers are taking action ahead of any policy easing.
There was a clear rebound in trading this quarter as regional bank meltdowns and concerns about new capital rules in 2023 led to a credit crunch and fewer loans. This reversal has several implications: First, unlike the rate-cutting cycle that followed the global financial crisis, The Fed stated It should start this year, maybe one will be packaged huge economic impact. Second, slowing economic growth should not be viewed as increasing recession risks but as a catalyst for shifting activity away from popular industries such as artificial intelligence and toward credit-sensitive industries such as real estate.
This bullish dynamic has Playing a role in corporate credit markets. Bond sales by highly rated U.S. companies are approaching first-quarter records, while the yield premiums required by junk-rated issuers have narrowed sharply, reflecting investors are less concerned about recessions and defaults and instead looking forward to rising risk appetite environment. The Fed is easing.
Weekly commercial bank data showed annualized growth in loans and leases so far this year was 4.7%, after being essentially flat in the fourth quarter.
The Fed’s quarterly survey of senior loan officer opinions released last month was also less concerning than before. Overall, while domestic banks still reported tightening commercial and industrial lending standards, far fewer banks tightened policy than last year following regional banking stress. If this trend continues, we may see a net loosening of lending standards in the second half of the year, regardless of whether the Fed takes action.
One of the reasons for banks to accumulate capital rather than deploy it is the regulatory uncertainty surrounding proposed capital requirements under Basel III rules (e.g. I wrote this in November last year). Banks criticized the scheme as being too punitive and warned it would harm household and business lending.Against this backdrop, it is worth noting that in recent testimony to Congress, Fed Chairman Jerome Powell suggested that there may be “Extensive substantive changes to the proposal,” Regulators could even scrap it entirely and start over. It stands to reason that some bankers will take this as a sign that they no longer need to be in capital-building mode.
In a sign of the more buoyant sentiment, the industry is weathering the woes of New York community banks well. There was no repeat of last year when most other stocks in the sector sold off and fled to the safe haven of JPMorgan. In fact, while NYCB’s stock plummeted in January and February, the KBW Bank Index was largely unaffected.
The immediate economic impact of all this is that when interest rates are much lower, companies and industries can worry less about their ability to refinance their debt; lenders are not as prepared as they were last year. It’s not that debt for aging office towers will suddenly be in high demand, but the commercial real estate industry’s “survive until 2025” mantra no longer applies to everyone — and more borrowers should be able to finance the loans that are of concern Refinanced even months ago. This in turn reduces the risk of a wave of defaults that could cause broader stress on banks and credit markets.
It also illustrates how much the Fed will need to cut interest rates as it weighs the risks of upward inflation and downside risks to economic growth. Loan markets are somewhere between recovery and health based on tighter credit spreads, a surge in corporate bond issuance, a resurgence in commercial bank loan growth and a potential shift from tightening to loosening lending standards. Market expectations and the Fed’s guidance for moderate policy easing starting in the summer look like an appropriate easing of monetary restrictions.
At the same time, if there is an unexpected downturn in the labor market or the broader economy, the Fed will have the ability to significantly cut interest rates. That could accelerate growth in credit-sensitive sectors including real estate, which has stabilized even as borrowing costs are higher and there is clear pent-up demand waiting and hoping for lower interest rates. From here, the outlook for economic growth looks pretty good, the only question is whether it will be driven more by investment in technology and artificial intelligence, as we are seeing now, or by the credit-sensitive parts of the economy, if The Federal Reserve believes that expansion carries certain risks.
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