NEW YORK -- Demand for credit has picked up markedly since the end of 1993 and has contributed to this year's rise in interest rates, Kevin Logan, chief U.S. economist for Swiss Bank Corp., said in the Standard & Poor's Corp. publication Credit Week.
Mr. Logan said the aggregate credit demand had not received much attention from economists and analysts. but he warned that if it continues to accelerate. "we can be almost certain that interest rates. especially short-term interest rates, will continue to rise this year and well into 1995."
Lagging Behind Business Cycle
The New York-based economist wrote that changes in the demand for credit are nearly contemporaneous with changes in economic growth.
"If anything, credit demands lag the business cycle slightly," Mr. Logan said. "The recessions and booms of the 1970s and 1980s are clearly marked by the corresponding bouts of expansion and contraction in the growth of credit.
"This pattern held until the end of the 1980s when an extraordinary development took place: growth in the creation-of credit collapsed.,
Total outstanding debt in real terms actually fell in 1991, 1992, and 1993. That, Mr. Logan said, helps explain why the recovery from the 1990-91 recession was relatively slow and why economic growth has accelerated in the past year.
The Federal Reserve's easier monetary 'policy in 1991 and 1992 "arrested the decline in credit demands, but did little to revive it," he said. "Debt had to be liquidated, banks had to be recapitalized, and balance sheets had to be repaired before the process of credit creation could be turned around."
Balm for Financial System
The lowering of short-term interest rates in 1.992 and 1993 "helped heal the financial system, but it did not stimulate borrowing and spending," Mr. Logan added. "This is why the pace of the recovery starting in 1991 was so slow. The normal surge in the use of credit simply did not occur."
He predicted stronger economic growth, probably through 1995, due to the pickup in private credit demand.
The upturn in credit demand was a modest 5% over the last year, compared with an average increase of close to 10% in the 1970s and 1980s, the economist said. "But the total figure disguises some real vibrancy in certain credit sectors," he added.
'Modest Restraint' Foreseen
"If credit growth continues to move up, the Fed will undoubtedly move to a policy of modest restraint." Mr. Logan said.
He sees the federal funds rate rising to 5% by yearend from the current 4.25%.
Some observers, he said, have noted that the growth of monetary aggregates remains sluggish and that bank reserves have actually contracted over the past few months.
While this implies that the Fed may already have done enough to slow economic growth, "the monetary aggregates have not been a good gauge of the thrust of monetary policy for the last few years."