Commercial and industrial (C&I) and commercial real estate (CRE) loans on banks' balance sheets expanded at a rapid pace in April and May. Issuance of both agency and non-agency commercial mortgage-backed securities (CMBS) stepped down slightly in May from its strong pace earlier in the year. Small business loan originations through April were in line with pre-pandemic levels and indicated that credit appeared to be available.
Residential mortgage credit remained widely available through May for most borrowers. While refinance volumes continued trending lower in April and May amid higher mortgage rates, outstanding balances of home equity lines of credit at commercial banks posted the first significant increase in more than a decade, likely reflecting a substitution by homeowners away from cash-out refinances. In consumer credit markets, auto loans outstanding grew at a robust pace in the first quarter, consistent with a rebound in auto sales, but slowed in April and May. Credit card balances at commercial banks rose in April at the fastest pace seen in recent decades, but growth slowed in May.
Borrowing costs had continued to increase in many sectors since the previous FOMC meeting. Yields on nonfinancial corporate bonds remained well above pre-pandemic levels, and new issuance spreads for institutional leveraged loans ticked up in May. Bank interest rates for both C&I and CRE loans also increased. Among small businesses that borrow on a regular basis, the share facing higher borrowing costs rose in both April and May. Borrowing costs for residential mortgage loans increased significantly over the intermeeting period, in line with the increases in MBS and Treasury yields, reaching their highest levels since 2010. In consumer credit markets, rates on auto loans and new credit card offers continued to trend upward.
Despite the historically low volumes of defaults on both corporate bonds and leveraged loans in April, in the later weeks of the intermeeting period the volume of credit rating downgrades of leveraged loans exceeded the volume of upgrades. In addition, market indicators of future default expectations of businesses deteriorated to some extent, as investors appeared to mark down their assessment of the macroeconomic outlook.
Credit quality of business loans on banks' books remained sound, with C&I and CRE delinquency rates continuing to be low through March. Nonetheless, banks allocated net positive loan loss provisions in the first quarter of this year. This development reversed a pattern of loan loss reserves being released throughout last year and reflected concerns about the credit quality outlook. Delinquency rates on CMBS and small business loans continued to decline, and the credit quality of municipal securities remained strong.
Household credit quality remained solid, with the share of consumers with subprime credit scores still near historical lows. In addition, mortgage delinquencies and the share of mortgages in forbearance both continued to trend down in recent months. While nonprime auto loan delinquency rates edged down a touch in the first quarter, credit card delinquency rates for account holders with below-prime credit scores inched up from low levels. The sizable increases in credit card purchase volumes through March were roughly offset by high levels of credit card payments, thus increasing household borrowing only slightly.
Staff Economic Outlook
The projection for U.S. economic activity prepared by the staff for the June FOMC meeting implied a trajectory for real GDP that was lower than in the May projection. The staff continued to project that GDP growth would rebound in the second quarter and remain solid over the remainder of the year. However, monetary policy was assumed to be less accommodative than in the previous projection, and the recent and prospective tightening of financial conditions led the staff to reduce its GDP growth forecast for the second half of 2022 and for 2023. The level of real GDP was still expected to remain well above potential over the projection period, though the gap was projected to narrow significantly this year and to narrow a little further next year. Labor market conditions also were expected to remain very tight, albeit somewhat less so than in the previous projection.
With regard to PCE price inflation, the staff revised up its projection for the second half of 2022 in response to stronger-than-expected wage growth and the staff's assessment that the boost to inflation from supply–demand imbalances in the economy, including in food and energy markets, would be more persistent than previously assumed. All told, total PCE price inflation was expected to be 5.0 percent in 2022, while core inflation was expected to be 4.1 percent. PCE price inflation was then expected to step down to 2.4 percent in 2023 and to 2.0 percent in 2024, as energy prices were forecast to decline and as supply–demand imbalances were projected to diminish because of slowing aggregate demand and an easing of supply constraints. Similarly, core inflation was projected to slow to 2.6 percent in 2023 and to 2.2 percent in 2024.
The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and that the risks to the inflation projection were skewed to the upside. The staff judged that the ongoing war in Ukraine remained a possible source of even greater upward pressure on energy and commodity prices, while the war and adverse developments associated with China's zero-COVID policy were both perceived as increasing the risk that supply chain disruptions and production constraints would be further exacerbated in the United States and abroad.
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