For Fed, uptick in bank lending may add to case against rate cuts

By Ann Saphir

Jan 28 (Reuters) – Still-elevated inflation and a labor market that has weakened but not collapsed are the main reasons the Federal Reserve is widely expected to wrap up its two-day meeting Wednesday with a hold on the U.S. policy rate.

But on the margin, somewhat easier credit conditions may also help make the case against cutting interest rates, at least for now.

Increased demand for bank loans, evident in surveys and in the latest round of bank earnings reports, suggests that borrowing costs are not overly constraining businesses from investing or consumers from spending. Analysts say they anticipate that trend will continue. 

“Looking ahead, we expect banks will become more willing to lend as economic growth picks up on the back of fiscal stimulus, uncertainty diminishes and businesses and consumers maintain strong balance sheets,” said Nationwide economist Oren Klachkin, adding that aggressive deregulation pushed by the Trump administration should also lead banks to extend more credit than otherwise. 

While the Fed’s latest survey on banking conditions won’t be published until next week, findings from the January Senior Loan Officer Opinion Survey were scheduled to be in policymakers’ hands this week.

November’s survey showed rising loan demand, particularly from businesses and for homes, even as banks tightened credit terms.   

A more recent survey from the Dallas Fed showed lending and demand for loans continued to rise in December at Texas banks, whose experiences often mirror those of the nation’s lenders as a whole.

Banks were generally optimistic, the survey showed, expecting rising loan demand and business activity in the first half of the year, along with a slight deterioration in loan performance.  

Big bank executives have warned that President Donald Trump’s proposed 10% cap on credit card interest rates could result in a pullback in lending. Even so, Wall Street’s biggest banks reported rising profits and increased borrowing from both consumers and businesses.

Average loans climbed 9% last quarter at JPMorgan Chase and 8% at Bank of America, the top two U.S. banks by assets. 

“Broader financial conditions are loose and getting gradually looser, which will support economic growth this year,” said Oxford Economics analyst Michael Pearce.

For now financial markets are pricing two quarter-point interest-rate cuts in the second half of the year.

Ultimately, Fed policymakers are focused on their two goals of price stability and a healthy labor market, and those metrics will remain front and center as they weigh what to do in coming months. 

“The Fed is uncertain about the directionality of both parts of its dual mandate so bank lending takes a back seat to other indicators that more directly assess near-term inflation and joblessness,” said Natixis’ economist Christopher Hodge. “Growth is strong, the unemployment rate is fine, and inflation is high. Why cut?” 

(Reporting by Ann Saphir;)