By Qudsia Bano

The Federal Reserve's decision to keep interest rates unchanged has provided stability in benchmark borrowing costs, but uneven lending conditions continue to limit access to finance for smaller businesses and financially weaker households, even as productivity gains support US economic growth.

The Federal Open Market Committee maintained the federal funds target range at 3.75% to 4.00% on October 28. The decision was approved by a 10-2 vote, with two members preferring another quarter-point increase.

The Fed said economic activity was expanding at a strong pace, supported by strong productivity growth and robust capital investment, although inflation remained elevated.

According to the US Bureau of Economic Analysis, real gross domestic product increased at an annual rate of 3.4% in the third quarter, compared with 2.2% in the second quarter.

Meanwhile, the Bureau of Labor Statistics reported that nonfarm business productivity increased 1.4% at an annual rate in the second quarter and was 2.2% higher than a year earlier.

Speaking to Wealth Pakistan, Adil Ahmed, Director of Compliance at Khushhali Bank, said stronger productivity could support economic resilience without necessarily improving financing conditions evenly across businesses and households.

“A rate pause can prevent an immediate increase in benchmark borrowing costs, but credit availability depends on much more than the policy rate. Banks still assess cash flows, collateral, sector risk and borrower quality, so stronger firms may benefit sooner than smaller or riskier borrowers,” he said.

The Federal Reserve's October Senior Loan Officer Opinion Survey highlights this divergence in credit conditions.

Banks reported that lending standards for commercial and industrial loans to large and middle-market firms remained broadly unchanged during the third quarter, while standards tightened for small firms, defined by the Fed as businesses with annual sales below $50 million.

Banks also reported tighter collateral requirements and greater use of interest-rate floors for small firms, while premiums on riskier loans increased for businesses of all sizes.

Maham Imran, Research Associate at Foundation Securities, said the divergence could influence how productivity gains were distributed across the economy.

“If firms with stronger balance sheets can obtain financing more easily, they are better positioned to invest in technology, equipment and process improvements. Smaller businesses facing tighter lending standards may find it harder to make the same productivity-enhancing investments,” she said.

Imran explained that these differences could create a financing gap between companies already benefiting from productivity improvements and those struggling to access capital for technological and operational upgrades.

“Higher productivity can improve margins and credit quality, but access to the financing needed to generate those gains is not equally available. That can reinforce differences between firms over time,” she added.

The divide is also evident in household lending, where access to credit varies according to borrowers' financial profiles.

The Fed survey found that banks were more likely than a year earlier to approve credit-card applications from super-prime and prime borrowers, but less likely to approve applications from subprime borrowers.

Banks also tightened credit limits and raised minimum credit-score requirements for auto lending, indicating continued caution towards borrowers with weaker credit profiles.

Overall credit demand remained weak, with banks reporting softer demand for commercial and industrial loans from firms of all sizes.

Ahmed said the Fed's decision to maintain interest rates should not be interpreted as an across-the-board easing of financial conditions.

“The policy rate sets an important benchmark, but the transmission of that rate is uneven. When lenders remain cautious, a pause can stabilise financing costs without automatically expanding access to credit,” he said.

Imran said the productivity backdrop made this uneven transmission increasingly important for businesses and households.

“If productivity continues to improve while credit remains concentrated among higher-quality borrowers, headline economic strength can coexist with tighter conditions for smaller firms and weaker households,” she said.

The Fed therefore faces an economy in which solid growth and productivity improvements provide resilience, while lending standards continue to impose meaningful constraints on parts of the credit system.

For policymakers, the challenge extends beyond maintaining interest rates at levels consistent with containing inflation. It also involves understanding whether existing financial conditions allow productivity gains to spread across businesses and households rather than remaining concentrated among borrowers already best positioned to invest.

Credit: INP-WealthPk