ORLANDO- The gulf between financial markets’ and Federal Reserve Chair Jerome Powell’s view of the US economy could not be wider, but two national credit conditions and lending surveys within 24 hours of each other could narrow the chasm.
The Fed releases its quarterly Senior Loan Officer Opinion Survey, or ‘SLOOS’, on Monday May 8, and the National Federation of Independent Business’s April survey of small businesses will be released the following day.
They come at a critical time – after 500 basis points of interest rates hikes in little over a year, turmoil in the regional US banking sector is intensifying and claiming more victims.
Lending standards, which were already at levels consistent with past recessions, according to several indicators in the most recent ‘SLOOS’ and NFIB surveys, will only tighten further.
The question is how much more – enough to actually tip the economy into recession and force the Fed to cut rates in the second half of the year, as futures markets are aggressively pricing? Or not?
Powell and his colleagues have seen the ‘SLOOS’ report. Speaking to reporters after the Fed raised rates to a 16-year high on Wednesday, Powell said it is “broadly consistent” with the recent tightening in lending standards, and will show that “lending has continued to grow but the pace has been slowing since the second half of last year.”
Although tighter credit conditions will weigh on economic activity, hiring and inflation, recession can still be avoided. “It’s possible that this time is really different. The case of avoiding a recession is, in my view, more likely than having a recession,” Powell said.
If US rates futures are the barometer, however, financial markets could not disagree more.
Secured Overnight Financing Rate (SOFR) futures on Thursday priced in as much as 100 basis points of easing by year-end, and Fed funds futures indicated the first cut could be as early as July. – Reuters
