DEFINITION of Loose Credit
Loose credit is the practice of making credit easy to come by, either through relaxed lending criteria or by lowering interest rates for borrowing. Loose credit often refers to central banking monetary policy and whether it is looking to expand the money supply (loose credit) or contract it (tight credit).
Loose credit environments may also be called "accommodative monetary policy" or "loose monetary policy."
BREAKING DOWN Loose Credit
The U.S. markets were considered a loose credit environment between 2001 and 2006, as the Federal Reserve lowered the Fed funds rate and interest rates reached their lowest levels in more than 30 years. In 2008 during the economic crisis, the Fed lowered the benchmark rate to 0.25% and it remained at this rate until December 2015, when the Fed raised the rate to 0.5%. The periods of loose credit, between 2001 and 2006 and then from 2008 until now, allowed the economy to expand, as more people were able to borrow. This also led to increased asset investment and spending on goods and services. In its latest move in March, the Fed raised the fed funds rate a quarter point to 1.75%.
Central banks 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) that affects the largest banks and borrowers first; they, in turn, pass the rate changes along to their customers. The changes eventually work their way down to the individual consumer via credit card interest rates, mortgage loan rates and rates on basic investments like money market funds and certificates of deposit (CDs).
Quantitative Easing and Loose Credit
During the financial crisis that began in 2008, the Fed initiated quantitative easing (QE), another monetary policy mechanism to loosen credit and increase the money supply. With quantitative easing, a central bank purchases government securities or other securities from the market to lower interest rates and increase the money supply. It’s used to stimulate the economy by enabling businesses to borrow money at an attractive rate. Quantitative easing is considered when short-term interest rates are at or close to zero, and does not involve the printing of new banknotes. The Fed undertook an ambitious QE effort when it added almost $2 trillion to the money supply and doubled the debt on its balance sheet by $2 trillion to almost $4.5 trillion from 2008 to 2014.