The Fed asks banks about credit conditions for firms and consumers, and the latest Senior Loan Officer Survey shows that banks are starting to tighten lending standards on commercial and industrial loans.
This is what the Fed wants to see because the goal for the FOMC is to slow down hiring and capex spending and, ultimately, inflation.
The challenge for the Fed is that the ongoing tightening in lending standards has not yet resulted in a corresponding widening in high yield spreads, see chart below.
The Fed’s goal is to tighten financial conditions and credit conditions, and if credit spreads don’t widen out further, then the Fed will have to do more with rates. Financial conditions are not tightening as much as the Fed would like to see, and as a result, the Fed will have to do more of the work by raising short-term interest rates further. Because the Fed is fully committed to getting inflation down from the current level at 8.5% to the Fed’s 2% inflation target.
For markets the conclusion is straightforward: The Fed wants to tighten financial conditions and investors should be positioned accordingly.
Source: FRB, Haver Analytics, Bloomberg, Apollo Chief Economist
This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).
Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.
Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
