(Bloomberg Opinion) -- If the ultimate goal of lower interest rates is to spark economic activity through demand for loans, then the Federal Reserve’s first cut in more than a decade can be deemed a failure.
After the central bank lowered its target rate for overnight loans between banks on July 31 to a range of 2% to 2.25%, demand for credit among companies of all sizes was little changed in August from the first seven months of the year, based on the Fed’s own data. Its weekly report on commercial and industrial lending – based on a sample of about 875 domestically chartered banks and foreign-related institutions and released every Friday afternoon – shows total loans outstanding rose by a seasonally adjusted $10.1 billion last month, to $2.36 trillion. That’s an increase of 0.43%, versus an average of 0.34% in the January-through-July period and 0.74% last year.
This isn’t a problem of access. The Fed’s most recent quarterly survey of senior loan officers, released Aug. 5, showed that banks left lending standards for large and middle-market firms relatively lax and eased standards for smaller borrowers. And no municipality, company or individual is saying that credit is too expensive or too hard to obtain. Financial conditions are looser now than the average over the past five years, according to data compiled by Bloomberg.
That means demand is the problem. The National Federation of Independent Business’s latest monthly index of sentiment among U.S. small businesses, released Aug. 13, included a special question that asked participants whether a 100 basis-point reduction in borrowing costs would change their capital spending plans over the next 12 months. Only 12% said "yes," while 21% said "no" and 24% said they weren’t sure. Another 43% said they "were not planning on borrowing money." And while last week saw a boom in corporate bond issuance, with investment-grade-rated firms raising about $75 billion in the U.S. – the most for any comparable period since records began in 1972 – Bloomberg News reports that the bulk of the proceeds went toward refinancing debt rather than toward capital expenditures.
It’s no surprise that companies are hesitant to take on more debt. The escalating and increasingly unpredictable trade war between the U.S. and China has made it almost impossible for businesses to handicap the outcome, thereby delaying spending and investment. A study released by researchers at the Fed last week found that the rise in trade tensions cut global economic growth by 0.8 percentage point in the first half of 2019 alone. “Renewed uncertainty since May of 2019 points to additional knock-on effects that may push down GDP further in the second half of 2019 and in 2020,” the authors of the study wrote.
The cynics would probably say that sluggish loan demand and recent reports such as that from the Institute for Supply Management showing a contracting manufacturing sector are evidence that the Fed is behind the curve and should have loosened monetary policy much sooner and more aggressively.
History will prove whether such criticism is valid, but it’s hard to deny that the Fed is basically pushing on a string at this point. It increasingly needs help from the government in the form of fiscal stimulus to keep the expansion going, but the odds of Republicans and Democrats coming together on a big fiscal stimulus measure that boosts the economy and stokes loan demand looks increasingly unlikely heading into an election year.
So while the Fed may follow through on the market’s expectations and cut rates two to three more times by year-end, the moves may do little to get companies to boost their borrowing and spending. The economists at JPMorgan Chase & Co. said it best when they wrote in a Sept. 4 research note addressing global conditions that “it is still unclear how much good lower rates will do given business sentiment is so depressed. But doing nothing may be even worse. Better would be fiscal actions. Unfortunately, although we are seeing some modest loosening of the purse strings the political willpower for this is limited.”
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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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