Loose Credit

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Loose Credit

What Is Loose Credit?

Loose credit is the practice of making credit simpler to get, either by loosened lending requirements or by decreasing borrowing interest rates. Loose credit often refers to a country’s central bank’s policy, whether it seeks to grow the money supply via the banking system (loose credit) or reduce it (tight credit) (tight credit).

Loose credit settings are also known as accommodating or loose monetary policy.

Key Takeaways

  • Loose credit is the practice of making credit simpler to get, either by loosened lending requirements or by decreasing borrowing interest rates.
  • Central banks may relax lending by using a variety of measures, including interest rate manipulation.
  • The United States Federal Reserve has engaged in more lax credit policy in recent years, most recently in reaction to the economic effects of government-imposed shutdowns in 2020.

Understanding Loose Credit

The techniques available to central banks to produce loose or restrictive credit regimes vary. Most countries have a central borrowing rate (such as the Fed funds rate or discount rate in the United States) that impacts the biggest banks and borrowers first; rate adjustments are then passed on to their consumers. Changes in credit card interest rates, home loan rates, and rates on basic assets such as money market funds and certificates of deposit ultimately filter down to the individual consumer (CDs).

Central banks may also ease policy by purchasing significant amounts of assets, a practice known as quantitative easing. This entails buying government-backed or other assets and printing enormous amounts of fresh money in the form of bank reserves. It does not immediately cut interest rates or relax credit conditions, but instead fills the financial system with additional liquidity in the expectation that banks would lend more.

  How Credit is Scored/Rated for Individuals, Companies, and Governments

In contemporary times, central banks typically loosen credit to avert or reduce a recession and restrict credit when the inflationary repercussions of prior periods of loose credit begin to manifest themselves in increasing wages and consumer prices. This puts them in a loop of determining monetary and credit policy in response to the long-term consequences of prior policy choices.

Loose Credit in Recent Years

Between 2001 and 2006, the United States’ markets were deemed to be in a loose credit climate, with the Federal Reserve lowering the Fed funds rate and interest rates reaching their lowest levels in more than 30 years. After that, the Fed tightened monetary policy for a few years. The Fed then returned to permissive lending policy in 2008, dropping the benchmark rate to 0.25%; it stayed at this rate until December 2015, when it was lifted to 0.5%.

These liberal credit durations were designed to encourage lenders to lend and borrowers to take on greater debt. In principle, this should lead to higher asset values and consumer expenditure on products and services (as the newly created money and credit enters the economy).

From 2016 to 2018, the Fed progressively tightened monetary policy in very tiny increments again.

In order to avert a recession, the Fed started easing policy again, reducing rates through the second half of 2019. Furthermore, with the start of the government shutdown of large sectors of the global economy in 2020, the Fed initiated a fresh cycle of extraordinarily loose money and credit policy in an effort to cushion some of the continuing economic damage and support the new initiatives approved by the CARES Act.

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