Banks warn of lending pullback, fueling recession fears - POLITICO

Federal Reserve Chair Jerome Powell last week said that banking conditions are tightening, even as fears of a recession subside. | Jose Luis Magana/AP Photo

Wall Street traders are increasingly bullish that the Federal Reserve can cool inflation without pushing the economy into a recession. Lenders aren’t so certain.

U.S. banks expect to tighten loan standards across the board in the second half of the year amid an “uncertain economic outlook,” the Fed said Monday in its quarterly survey of lending activity.

The survey, which collected responses from banks in June, found lenders losing their appetite for riskier loans amid concerns over deposit outflows, potential regulatory risks and the growing costs of funding their operations.

Tightening credit availability could pose a challenge to President Joe Biden as he attempts to sway a skeptical public on his “Bidenomics” track record. It could slow the spigot of money needed to grow businesses and jobs as the Fed hikes borrowing costs in its bid to tame inflation.

Banks have been warning that tougher credit conditions could be in store for months, in part because of industry jitters triggered by the failures of Silicon Valley Bank, Signature Bank and First Republic. Some of those concerns have started to fade, however. The KBW Nasdaq Regional Banking Index, which tracks the shares of smaller and mid-sized lenders, has climbed by more than 30 percent since mid-May.

While Fed staff is no longer forecasting a recession, Chair Jerome Powell last week said that banking conditions are tightening.

Powell said the “process is ongoing and that will restrain economic growth,” even though bank lending is “up significantly” compared to last year.

“It seems like the economy is weathering this well,” Powell said. “Of course we’re watching it carefully and expect to continue to do that. “

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