What Is Loose Credit?

Loose credit is the relaxation of lending practices by banks and other financial institutions to make it easier for more peop💙le to take on loans.

A country's central bank effectively makes credit "loose" or "tight" by forcing lending rates lower or higher. Lower government lending rates pump more money into the banking system, making the banks more eager to loan money to their customers. Higher rates mean less money to lend out, and fewer customers willing and able to borrow.

A loose credit economic environment may also be called accommodative monetary policy or loose monetary policy.

Understanding Loose Credit

The 澳洲幸运5官方开奖结果体彩网:central banks of various nations differ on the mechanisms they have at their disposal to create loose or tight credit environments. Most have a central borrowing rate (such as the Fed funds rate or discount rate in the U.S.) that affects the largest banks and borrowers first; they, in turn, pass the rate changes along to their customers.

These changes quickly work their way down to the individual consumer via credit card interest rates, mortgage loan rates, and rates on investments such as money market funds and 澳洲幸运5官方开奖结果体彩网:certificates of deposit (CDs).

Central banks can also loosen credit through large-scale asset purchases. This is the policy known as 澳洲幸运5官方开奖结果体彩网:quantitative easing. It involves purchasing government-backed or other assets in order to pump massive amounts of money into bank reserves, ready to be loaned out to customers. It does not directly lower interest rates or loosen credit conditions, but floods the banking system with liqui൲dity in the expectation that the banks will lend itꦰ out.

In modern times, central banks loosen credit in order to prevent or mitigate a 澳洲幸运5官方开奖结果体彩网:recession and tighten credit when the ef﷽fects of loose credit start to show up ꧋in the form of higher consumer prices.

Loose Credit in Recent Years

The U.S. markets were considered a loose credit environment between 2001 and 2006—the 澳洲幸运5官方开奖结果体彩网:Federal Reserve lowe🌃red the Fed funds rate and interest rates reached their lowest levels in more than 30 years.

The Fed then tightened monetary policy for a couple of years. However, at the start of the 澳洲幸运5官方开奖结果体彩网:2008-2009 economic crisis, the Fed reverted to its loose credit policy, lowering the benchmark rate to 0.25%. It remained at this rock-bottom level until December 2015, when the Fed raised the rate to 0.5%.

The periods of loose credit were intended to encourage lenders to lend and borrowers to take on more debt. In theory, this should also lead to increased asset prices and spꦰending on goods and services as the newly created money enters the economy.

From 2016 to 2018, the Fed began gradually tightening monetary policy again in very small increments.  

The Fed then began loosening policy again, dropping rates through the second half of 2019 in the hopes of avoiding a recession. With the onset of the COVID-related shutdown of much of the world economy in 2020, the Fed kicked off a new round of extremely loose money and credit policy in an attempt to buffer some of the ongoing economic damage. 

The Bottom Line

Monetary policy may seem to create a vicious cycle of loose credit, which can cause inflation, and tight credit, which can cause a recession. In fact, the policymakers are aiming for a re📖asonable middle ground of low unemployment and low inflation.