Washington, D.C., Nov 9 -

By Robin Harding; Financial Times

Bank loan officers say that demand for loans from small US companies fell in the past three months, casting doubt on how much the Federal Reserve can stimulate the economy.

Twenty-nine per cent of banks said that demand for loans from companies with sales below $50m had fallen, compared with only 7.1 per cent of banks that reported a rise, according to a Federal Reserve survey of senior bank loan officers.

The tepid demand for loans from small businesses reduces the chance of a strong rebound in growth in 2011 and suggests that even rock-bottom interest rates and easier borrowing conditions may not persuade them to invest.

Last week the central bank launched a $600bn programme of asset purchases aimed at driving down long-term interest rates to encourage spending and investment and support the economic recovery.

Every bank reporting a decline in small business loan demand said that its customers had cut back on their investment in plant or equipment.

There was a decline in loan demand from larger companies as well, with 25 per cent of loan officers saying it had fallen, compared with 18 per cent who said that it rose.

The survey came as four members of the rate-setting federal open market committee gave speeches warning that the Fed’s new programme of asset purchases made it even more urgent that Congress tackle the US fiscal deficit.

“For the next eight months the nation’s central bank will be monetising the federal debt,” said Richard Fisher, president of the Dallas Fed. “The FOMC is taking a calculated risk. If the Congress and the executive fail to deliver, I believe the FOMC will have to consider changing course.”

Mr Fisher and Thomas Hoenig of the Kansas City Fed, who said “there will be enormous pressure on the central bank” to keep financing the federal deficit, both fear the Fed’s asset purchases could lead to inflation. Mr Hoenig voted against the new asset purchase programme.

Kevin Warsh, Fed governor, set out two further concerns: that purchases of Treasury securities could distort the risk-free rate used to price other assets and that, by holding down long-term rates, they could hide market signals that would encourage politicians to tackle the deficit.

“As the Fed’s balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. And if market participants come to doubt these prices – or their reliance on these prices proves fleeting – risk premiums across asset classes and geographies could move unexpectedly,” said Mr Warsh.