WASHINGTON / Bloomberg
Federal Reserve policy makers are beginning to worry that a corporate-credit squeeze will constrict the economic
With banks tightening standards on business loans and investors demanding higher yields on some corporate debt, companies may find it harder and more expensive to raise the money they need to grow. The concern is that could prompt them to cut back on spending and hiring, hurting the U.S. economy in the process.
Central bank Chair Janet Yellen flagged the Fed’s focus on credit availability for businesses in an appearance before Congress last week. “That is an important factor” in assessing the outlook for the economy and Fed interest-rate policy, she said on Feb. 10. The toughening of credit criteria by banks “is something that bears watching,” she added.
As policy makers raised interest rates in December for the first time since 2006, they projected an additional four quarter-percentage-point increases for this year. In presenting the central bank’s semi-annual report to lawmakers last week, Yellen suggested that rate rises may be delayed due to turmoil in financial markets.
In making the case in a speech on Tuesday against hurrying to boost rates, Boston Fed President Eric Rosengren pointed to “headwinds from abroad that slow exports and financial volatility that raises the cost of funds to many firms.”
Investors will get another peek into the Fed’s thinking Wednesday, with the release of the minutes of its January meeting.
The central bank left interest rates unchanged last month, saying it was “closely monitoring global economic and financial developments” to see how they would bear on the outlook.
Economists at Credit Suisse Group AG in New York last week pushed back their forecast of the Fed’s next rate increase to September from June, in part because of what they described as “hints of tighter business credit.”
Banks stiffened lending criteria for commercial and industrial loans in the final three months of 2015 for the second straight quarter, the first back-to-back toughening of terms in six years, according to a Fed survey released on Feb. 1. They also tightened terms on commercial real estate credit, Yellen noted. What’s more, banks told the Fed they expect to strengthen standards on business loans and commercial real estate credit in 2016.
Senior loan officers gave a variety of reasons for the stricter stance on commercial and industrial credits, including the uncertain outlook for the economy, troubles in specific industries, particularly energy, and a reduced tolerance for risk.
Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co. have set aside more than $2 billion combined to cover souring energy loans and will add to that safety net if prices remain low, the companies reported last month.
Losses are mounting as more oil and natural gas producers default on debt payments and declare bankruptcy.
Wells Fargo lost $118 million on its energy portfolio in the fourth quarter and Citigroup lost $75 million. “It takes time for losses to emerge, and at current levels we would expect to have higher oil and gas losses in 2016,” John Stumpf, Wells Fargo’s chairman and chief executive officer, told Wall Street analysts on Jan. 15.