WASHINGTON — A recent tightening of credit for U.S. companies is threatening to undermine economic growth, making it less likely the Federal Reserve will raise interest rates anytime soon.
Fed Chairwoman Janet Yellen said last week it was still too soon for the central bank to change its view that rate hikes are needed, a position supported by a still-robust pace of hiring that is helping consumers borrow more readily.
But a tightening of lending standards for U.S. businesses and rising corporate credit spreads suggest global financial market turmoil could lead the Fed next month to signal fewer rate hikes this year than the four increases policymakers signaled in December.
"Financial conditions are tightening the Fed's belt," Deutsche Bank, which expects one rate increase this year, said in a note to clients on Friday.
A net 4.2 percent of banks tightened standards on U.S. commercial and industrial loans to small firms in the fourth quarter, the highest level since late 2009, when the United States was just emerging from a deep recession, according to the Fed's Senior Loan Officer Opinion Survey.
While U.S. banks are still making it easier to get credit cards, tighter credit standards for small companies suggest global financial stress is spreading beyond export-oriented U.S. companies.
The question facing the Fed is: How much further will the tightening spread?
Yellen told lawmakers on Wednesday the Fed was assessing the potential impact from tighter lending standards and widening corporate credit spreads but said it was "premature" to decide whether the global shocks could change the interest rate outlook.
The Fed was in a similar situation in September, when plunging global equity markets and worries about China's economy helped convince policymakers to hold off on a rate hike.
Financial markets subsequently recovered and the Fed raised rates in December and signaled expectations of four more increases in 2016.