Lower Borrowing Rates Have Yet to Spur Lending

WASHINGTON - Loan demand was flat over the last six weeks even as banks lowered borrowing rates, the Federal Reserve announced Wednesday.

That's a turnaround from earlier this year when the central bank's periodic review of economic conditions, called the Beige Book, reported lending growth around the country, particularly in commercial and industrial loans.

Still, the lending news was mixed. For example, bankers out west told the Fed that loan demand is strong while bankers in the Mid-Atlantic region called demand for credit soft.

"Bankers do not see any indications that credit demand might pick up soon," the Federal Reserve Bank of Philadelphia noted.

The report added that in the Fed's New York district, which covers the money-centers in Manhattan, loan delinquency rates at 80% of the banks were stable or lower since the last Fed report was compiled in May.

That's good news, considering all the warnings banking regulators have been sounding about slipping underwriting standards.

"Almost all the banks have maintained their credit standards," the New York Fed concluded in its section of the report.

The overall economy continues to chug along although signs of softening are popping up on both coasts, according to the Beige Book.

The central bank's Federal Open Market Committee will review the report in preparation for its July 5-6 meeting. Some market watchers expect the Fed - reacting to the slowdown in economic growth - will lower interest rates at the meeting.

"It's not if they ease, but when," said Stuart G. Hoffman, chief economist at PNC Bank, Pittsburgh. "They could very well ease in July, but if they don't . . . then I think the odds go up for easing in August."

L. Douglas Lee, chief economist for Natwest Washington Analysis, agreed it's a close call, and predicted the vote will be split.

"My guess is that they probably won't (lower rates), but I won't be surprised if they do," he said. "This is when the members of the FOMC earn their money."

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