U.S. Federal Reserve officials are likely to leave their policy rate unchanged at the meeting next week, thanks in part to a dynamic that is now playing out: other forces are doing all of the work.

The benchmark rate that they set about every six weeks has been unchanged since July. This horizon now extends into December, if not further. Rates on the open markets that determine the borrowing costs of businesses and consumers continue to climb and are now poised to slow down what has so far been an amazingly strong economy.

In fact, the Federal Reserve will likely include a number of new tidbits about the lending climate in its briefing material ahead of its rate-setting meeting on Oct. 31 and Nov. 1.

The Fed will not publish its latest survey on the banking environment until Monday following next week’s meeting. However, experience suggests that policymakers should have received results from its October Senior Lender Opinion Survey (SLOOS) this week.

The Fed started its rate-hike campaigns against high inflation in March of 2022. It took the policy rate from zero to 5.25%-5.5% as of July this year.

The data from the Fed’s surveys that are currently available in the public domain show that banks have already tightened their standards for business and consumer lending. Demand for many types of loans is down, and growth of all loans has also slowed.

In the Fed’s July Senior Loan Officers Opinion Survey, banks report that businesses have become especially uninterested in borrowing.

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These trends, along with the large increase in jobs, have not had much impact on GDP growth and consumer expenditure.

Scott Anderson of BMO said: “We do not have enough data to make a decision at this time.” He said that the tighter credit will have an impact on the economy, and “we are pretty confident” we will see a decline.

Fed policymakers are largely in agreement, and many have noted that the increase in yields on the benchmark 10-year Treasury notes – which is up by a full percentage since the Fed last raised rates, to 4.89% — will also cool down the economy.

PESSIMISM GETS EVEN WORSE

Weekly Fed data shows that the overall U.S. credit from commercial banks shrank in the third quarter. This is the first decline year-over-year in more than a decade.

The drop was mostly due to a fall in the value and yields of Treasury bonds. The value of mortgage-backed securities, which most banks hold, also dropped as mortgage rates rose, reaching a recent high of 7.9%, the highest in 23 years.

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According to the Dallas Fed’s twice-quarterly survey of Texas banking conditions, which closely follows the Fed’s national survey, a decline in loan demand that had been ongoing for a year accelerated in September’s second half.

This survey revealed that banks are more pessimistic than ever about the future of business, which has led them to predict even lower loan demand in the near future.

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The Dallas Fed survey revealed that banks responded with increased delinquencies for all types of borrowers, but especially for consumer loans. This could be an especially telling turn of events because other Fed data show that credit card borrowing in the U.S. did not slow down even though banks tightened their credit card standards.

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Kathy Bostjancic of Nationwide says that the gains in employment are not sustainable, and the household savings have been spent.

All of this could add up to a picture that sets the stage for an even weaker fourth quarter and a further slowdown next year. This is another reason for the Fed not to change rates and to let the tightening of credit and financial conditions take its course.

Bostjancic stated that the key question was how much growth would slow in the next quarters to relieve the inflation pressures on the services sector.

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