May 16, 2023
The Fed's rate hikes have made banks and businesses risk averse ahead of slower growth in the future, a one-two punch to lending which may cause the economic slowdown they anticipated.
The percentage of U.S. banks tightening lending standards on Commercial and Industrial (C&I) loans has gone from zero in April 2022 to 47%, the highest since the pandemic. At the same time, business demand for C&I loans has plunged to lows not seen since the 2008 global financial crisis.
When the double whammy of rate hikes on lending is this extreme, history suggests that lower economic growth, weaker earnings and higher unemployment follow.
Even though the economy has been resilient to the Fed’s rate hikes so far, investors shouldn’t get too complacent. We could still see a mild recession in the second half of 2023, as tighter credit availability filters through to the real economy.
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