Fed Finds Cooler Economy and Slower Lending After Bank Turmoil

April 21, 2023

Turmoil in the banking sector had led to slower lending and flattening economic growth, according to a recent report from the Federal Reserve.

Banks in several parts of the country have tightened their lending standards and are uncertain about liquidity and future growth after the collapse of Silicon Valley Bank and Signature Bank last month.

The Fed report, which is a compilation of economic anecdotes from business contacts across the country, found that 9 of the 12 Fed districts reported little or no change in economic activity over the six-week period ending April 10. 

However, the report does note that banking sector contacts have reported significant changes in lending behavior following the March crisis. Banks are tightening lending standards and scrutinizing prospective borrowers more stringently, leading to a decline in commercial and industrial loans in some regions.

The Philadelphia Fed reported that some banks are “focused on lending to existing customers and [becoming] more prudent in lending to new customers.” The St. Louis Fed noted that “deposits continued to decline, a situation which bankers attributed to rate competition among banks and to outflows to higher-yielding alternatives.”

The continued fallout from the recent bank collapses and the ensuing credit crunch is likely to weigh heavily on the Fed’s thinking regarding future rate increases. Fed Chairman Jerome Powell said last month that the impact of tighter lending will influence central bank thinking. The next meeting of the Fed’s committee will be in early May, and the markets are split between whether we will see an additional 25 basis point increase or a pause in the rate hikes.

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