Fed Says Loan Demand Remained Healthy Across U.S. in Last 6 Weeks

Loan demand, especially for commercial credit, remained strong across the country during the last six weeks, the Federal Reserve said Wednesday.

In its periodic report on economic conditions, the Fed also noted that the economy expanded in all 12 of its districts in May and June.

The Fed's Beige Book, which covers various sectors of the economy including banking, is compiled by researchers in the Fed's district banks for the Federal Open Market Committee. The Fed's monetary policy arm meets July 1 and 2 to decide whether to raise interest rates or not.

The committee raised the Fed funds target rate 25 basis points on March 25, the first hike in more than two years. Bank economists do not expect another increase at next month's meeting.

"Labor markets are tight without any significant wage pressures, which argues for keeping rates stable," said Kenneth T. Mayland, senior vice president and chief economist at KeyCorp in Cleveland.

"It would be very difficult to justify a hike in interest rates on July 1 and 2," agreed Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "The medicine Chairman (Alan) Greenspan has administered is working."

Paul L. Kasriel, chief domestic economist at the Northern Trust Co. in Chicago, said Fed policymakers could lift rates when they meet in August.

"There are a lot of concealed weapons but no smoking gun on inflation in this report," he said. "If consumer demand comes back then I think there is a good chance on Aug. 19 they'll squeeze off a 25 basis point round."

According to the Beige Book, bank underwriting standards held steady over the last six weeks. Those bankers who have been tightening clamped down on consumers.

Five of the Fed's 12 district banks reported competition for loans increased. The Federal Reserve Bank of St. Louis noted that the battle for commercial borrowers resulted "in more generous underwriting terms and narrower interest rate spreads."

The Dallas Fed said "steep competition" pushed down loan rates and diluted credit requirements, but the bank noted delinquency rates did not rise.

The New York Fed said delinquency rates fell on all types of loans with consumer loans showing the most improvement.

While loan pricing was stable in much of the country, the Kansas City Fed said some banks expect to raise their prime lending rates in near term.

Several Fed districts reported an uptick in mortgage lending, particularly home equity loans. "Several mortgage lenders suggested that the prospect of higher lending rates led homebuyers to commit to mortgages now rather than later," according to the Richmond Fed.

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