Banking

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The Federal Open Market Committee has kept the fed funds rate at almost zero since December 2008, and it has taken other steps aimed at spurring the economy. Yet the recovery has been inconsistent. At the Federal Reserve Bank of Atlanta's Banking Outlook conference on March 1, Atlanta Fed President Dennis Lockhart explained some of the reasons why accommodative monetary policy has so far not had more of an impact than it has.

Lockhart also believes the policy of low rates outweigh the costs, especially as the recovery is still gaining traction. He thinks the challenges of closing the employment gap call for this kind of sustained support for "what is, like it or not, a gradual process."

Lockhart focused his remarks on what is known as the transmission mechanism of monetary policy—the way the policy works its way into the real economy so that it can have the desired effect. In the case of lower rates and other forms of accommodative policy, the aim is to stimulate borrowing, spending, hiring, and overall economic growth.

Banking system important part of monetary policy channel
The banking system is an important element in this transmission dynamic, Lockhart said. Although current monetary policy is intended to increase borrowing and lending, lending growth has been weak for several reasons that fall under the general categories of loan demand and loan supply. On the demand side, companies large and small are in most cases not seeking much credit. Many large companies have strong balance sheets, are flush with cash, and are generating healthy earnings. Simply put, then, most big businesses do not need to borrow.

Small companies as a group, however, are struggling and worried about future revenue growth. These firms tend to be wary about taking on additional debt. Consumers, meanwhile, are by and large still trying to pay down debt rather than taking on more.

Many factors limiting credit supply as well as demand
Turning to the supply side of the credit equation, Lockhart listed several factors that are inhibiting lending:

• Tougher underwriting standards resulting from the financial crisis and recession
• Some banks being short on capital
• Many banks reducing high concentrations of loans in specific industries, notably commercial real estate and
• In some instances, the combination of stricter regulation and bank managements' need to improve regulatory ratings having led banks to focus on dealing with problems rather than finding new business.

"Long story short," Lockhart said, "low funding costs and abundant bank reserves produced by monetary policy still have not resulted in significant, broad-based loan growth." He noted that new data show that loan demand is beginning to pick up.