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Rate Hikes are Impacting Bank Lending Behavior

February 21, 2023 |
2 minute read
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As investors grapple with adjusting to 450 basis points of rate hikes (and likely more in sight), the debate on just how quickly monetary policy will transmit through the real economy has returned to the forefront.

Hopes of a rate hike pause or cuts have been the main drivers of the strong year-to-date returns, with markets even pricing rate cuts in the latter half of 2023 until late last week. A continuation of hawkish signaling from FOMC members along with a strong employment report spurred the market-implied terminal Fed Funds rate closer to 5 percent. At the center of the debate is whether Fed policy has been able to sufficiently tighten financial conditions and further slow the inflationary pressures throughout the economy. 

While some measures of financial conditions have shown relative easing as the tightening cycle approaches its assumed endgame, the recent Federal Reserve Senior Loan Officer Opinion Survey displayed a significant tightening amongst major lenders. The Senior Loan Officer Opinion Survey queries up to 80 of the large domestic banks and 24 U.S branches and agencies of foreign banks. The survey is broken down across five categories that range from considerable easing to considerable tightening in lending activity. This chart of the month displays the survey data over the last year. Most striking is the trend of banks that are reporting tightening, having nearly doubled since July 2022 to 43.3 percent. The stark difference in the survey results from just a year ago is one of many indicators of the new monetary regime that we have entered.

Commentary from the January survey not only reflect increasingly tightened loan standards but weakening demand for business and consumer credit, the latter a continuation of a trend that began in mortgage originations as rate hikes all but froze housing market activity. Higher standards were observed across sectors from real estate lending to auto loans and credit cards. The expectation from survey constituents is for both standards and demand to further tighten and weaken, respectively. Respondents cited the uncertain economic outlook and reduced risk tolerances as some of the main drivers behind tightening standards. 

Despite the survey’s clear signal of tightening financial conditions, other indicators are displaying the opposite. For example, the widely cited Goldman Financial Conditions Index has revealed easing financial conditions as we ended 2022 and entered the new year. Also, cross asset volatility has continued to decline as the MOVE Index1  continues its downtrend off a multi-year high. Certainly, the risk asset rally that we are currently experiencing has been fueled by hopes of easing financial conditions and the topic has been a continued highlight of FOMC communications over the past few months. Amongst all this uncertainty, there seems to be one clear truth: the macro backdrop will continue to dominate markets more than ever in 2023. 

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  1. The ICE BofA MOVE Index measures U.S. interest rate volatility by tracking the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries.
Cameron Dyer

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.