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Texans are taking out fewer loans. That’s expected, expert says

The Federal Reserve Bank of Dallas on Pearl Street.
Christopher Connelly
The Federal Reserve Bank of Dallas on Pearl Street.

University of North Texas finance professor Dr. Stephen Owen spoke with KERA about what a new banking survey means for businesses and consumers.

A recent survey from the Federal Reserve Bank of Dallas shows Texans are taking out fewer loans amid rising interest rates.

University of North Texas finance professor Dr. Stephen Owen says that's exactly what should be happening.

He spoke to KERA's Bekah Morr about what the banking survey means for businesses and consumers.

This transcript has been edited for length and clarity.

Can you walk me through exactly what the banking survey looked at?

The Fed is who dictates our monetary policy, right? So what they do through these interviews with different banks and people who work within those banks is try to gauge, how are they seeing the banking industry reacting both on the business side but also on the consumer side to these different changes in monetary policy. Because when we adjust monetary policy, essentially what we want to do is try to create a stable economic environment.

So right now we have this high inflation and we're still combating that, and so the Fed is adjusting these interest rates to to try to curb that inflation and slow it back down. They're trying to get a sense of — is it completing the objective that we are after? And then is it moving at a rate that's healthy? Because we don't want too quick of a reaction either way, but we also don't want it to be to where they're making these changes and it's not having any effect at all.

The survey said that loan demand has been declining for a year and that decline is increasing. Does that mean Texans aren't borrowing as much or taking out as many loans?

Whenever they increase these interest rates, think of it as they're increasing the cost of borrowing, and that's going to affect all loans. So by increasing these rates, we're making it more expensive to borrow money, which means people are going to be less inclined to borrow that money. What that does is it reduces the money that's circulating around in the economy and that helps reduce spending, which means that's going to bring those inflation numbers back down. So really, it's a natural thing. I look at that as a good thing. We hear pessimistic words, right? Like, “oh, loan demand is declining.” But in reality, that's exactly what the Fed is trying to do.

So looking forward, Texans who want to take out loans for a new car or a home or anything like that — what can they expect over the next six months or so?

There's a couple different ways to look at it. One is that it'll continue to be a little bit volatile as we work through the [economic] effects that really started during COVID. That was a pretty huge macroeconomic shock that affected everyone and so these are just kind of those natural effects of such a huge shock.

I would say also that rates fluctuate. They go up, they go down. We're kind of spoiled because, you know, back in early 2021, we were experiencing historically low rates and that was nice. So when these rates start to go back up to their historical levels or averages, it's kind of like, “man, it looks like it's really expensive.” And it is because the cost of living has also gone up, respectively.

But I would say as far as on a on a personal consumer side of things, just readjust the expectations. I want to think long term, not short term. Because again, these days rates will fluctuate, economic conditions will fluctuate and we see that all through history. But over the long run, it's a pretty smooth ride.

So if I'm making a decision about what I should do about a home or a new car or something like that, I just want to think, “what is my current state right now? What can I afford?” And just expect it to kind of stay that way. Because whenever we get into most of these loans, it's a fixed rate loan, so we'll lock in at whatever that rate is. Now, if the rates go down, we can always refinance and bring that rate down, which will make our monthly payments go down and things like that. But if they continue to go up, well, then we just locked in a good rate on something we can afford. And we're not dependent on those rates coming back down for us to be able to continue to live because we spent within our means.

Got a tip? Email Rebekah Morr at rmorr@kera.org. You can follow her on Twitter @bekah_morr.

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Bekah Morr