Financing conditions in the real economy are very restrictive

Last December, at the last Fed meeting of the year, its chairman Jerome Powell gave a speech with notoriously expansionary overtones that was subsequently taken as the long-awaited "turnaround" in the path of monetary policy. This speech also had the direct consequence of "easing financial conditions". But what exactly are we talking about when we refer to "financial conditions"?

In most cases, this is a reference to various indices relating to financial conditions in the markets. From this perspective, it is understandable that the last few months, marked by rapidly rising stock markets, a compression of corporate bond risk premia and a stabilisation of interest rates, correspond to an easing of financial conditions in the markets. However, it is important to distinguish this idea, which is closely linked to stock markets, from financial conditions in the real economy, where the easing is conspicuous by its absence.

Thus, US households remain under pressure. The 30-year mortgage rate (the housing market benchmark) remains above 7 % and demand for loans remains at extremely low levels. In addition, the average credit card interest rate remains well above 20% and rejected applications for auto loans continue to rise. Businesses, at least those not financed in the markets, are not in a much better position. The latest survey of SMEs by the National Federation of Independent Business found that the average rate paid on short-term loans is, at 9.8 %, at its highest in recent times and at levels not seen since the early 2000s. The situation is not much better in the euro area. In the European Central Bank's latest bank lending survey, there is a slight improvement in consumer credit, which is somewhat more marked in real estate lending. For businesses, on the other hand, the fall in demand for credit is accelerating, while lending conditions continue to tighten, albeit more mildly.

Therefore, while there is intense debate in the financial economy as to whether central banks have tightened monetary policy sufficiently and whether financial conditions are not too loose, in the real economy there is no doubt: financing conditions are very tight, and will remain so.