Credit outlook improves as soft landing odds grow

Bank economists are growing increasingly optimistic about the outlook for credit conditions and chances for a soft economic landing, according to the American Bankers Association's Credit Conditions Index..The headline credit index increased 7.6 points to 26.8, its highest reading in two years, which still indicates lenders will be cautious when extending credit to consumers and businesses over the next two quarters. Any reading above 50 indicates bank economists expect business and household credit conditions to improve..The index for consumer credit increased 11.7 points to 23.2, as credit quality concerns continue to limit optimism. The business credit index rose 3.4 points to 30.4, also its highest level in two years. "Though the majority of EAC members expect business credit quality to deteriorate over the next six months, several members expect availability to improve," according to the ABA. .Continued job growth is expected, and inflation is projected to fall toward the Federal Reserve's 2 percent long-term target. Three interest rate cuts are expected by the end of this year. .ABA Chief Economist Sayee Srinivasan said the index "reflects an uptick in optimism among bank economists as consumer spending and the labor market remain solid. Banks remain committed to lend prudently to consumers and businesses over the next six months as recession risks decline." .In late March, the EAC said a recession is becoming increasingly unlikely as it predicted the Federal Reserve will reduce interest rates 25 basis points three times in the second half of 2024. The rate cuts are expected to enable GDP growth of 1.7 percent this year and 1.8 percent in 2025. PCE inflation is expected to be 2.4 percent at the end of 2024 before falling to 2.1 percent by the end of 2025. .However, the timing of interest rate cuts is unknown after consumer prices increased at a higher-than-expected 3.5 clip for the 12 months ending in March. The Federal Reserve will review whether inflation moves past its current rough stretch before cutting interest rates, Fed Chair Jerome Powell said earlier this month. On April 5, Federal Reserve Gov. Michelle Bowman said interest rate increases could be necessary to control inflation.