Who’s Waiting on the Fed? Not the Credit Market

The timing and pace of Federal Reserve interest rate cuts will consume economists and market commentators for months to come. But an emerging story in 2024 is that lenders and borrowers are jumping the gun well in advance of any policy easing.

There’s been a noticeable bounce in transactions this quarter after a period of tightening credit and subdued lending that was brought on by 2023’s regional bank meltdown and concerns about new capital rules. There are a couple of implications to this reversal: First, unlike after the Global Financial Crisis, the rate-cutting cycle, which the Fed says should start this year, will probably pack an outsized economic punch. And second, an economic growth stumble shouldn’t be seen as increasing the risk of recession but rather as a catalyst to shift activity from hot industries such as artificial intelligence to more credit-sensitive ones such as housing.

This bullish dynamic has been at work in corporate credit markets. Highly rated US companies are approaching a first-quarter record for debt sales, while the yield premium demanded from junk-rated issuers has narrowed sharply, reflecting a risk-on environment where investors worry less about recession and defaults and, instead, look forward to Fed easing.

in demand junk bonds

Weekly commercial banking data show loans and leases growing at a 4.7% annualized rate so far this year following a fourth quarter where uptake was essentially flat.

better lending conditions