Broker Check

The Credit Cycle

| December 20, 2018

Interest rates have made headlines this year as the Federal Reserve continued to push short-term rates higher. Longer-term interest rates also increased although by less than short-term rates and the yield curve (graphical depiction of the interest rates on loans of different terms) flattened. This has created some concern that the credit cycle may come to an end as borrowers slow their pace of borrowing in response to higher interest rates or lenders increase lending standards due to concerns about future defaults.

In order to gauge the supply and demand for loans the Federal Reserve conducts regular surveys of senior loan officers. The survey asks about changes in loan standards, the lenders’ willingness to provide loans, and the demand for loans. This data can be used to estimate the health of the credit markets as interest rates change.

The October survey shows that demand for all types of loans (commercial, real estate, and consumer) has declined in recent months. However, credit standards have remained unchanged or in some cases have actually loosened as lenders’ willingness to make loans has increased. In other words, lenders would like to make new loans at the current higher interest rates but cannot find enough borrowers willing to pay the higher cost of the debt.

This may be a sign that interest rates are already too high to continue to fuel economic activity. Or it could be an indication that borrowers are taking a “wait and see” approach rather than borrowing at the new higher rates. Either way, it looks like there is still plenty of supply of credit should borrowers decide to take advantage of it.