The Federal Reserve Bank of Minneapolis hosted an economic forecast meeting this morning at their offices on the banks of the Mississippi. Economists Toby Madden and Rob Grunewald told a room full of reporters that conditions likely will worsen throughout 2009. Unemployment is expected to increase to as high as 7 percent in the Upper Midwest. This is a summary of their forecast.

There has been some debate about the extent to which banks have tightened up lending in the last few months. In this paper published in October, Fed economists argue that reports of credit drying up are exaggerated. Madden, however, said that the Minneapolis Fed Bank wanted to get a better handle on the answer.

“We decided to do some additional surveys and ask additional questions on our current surveys,” he said in an interview this morning. “Based on those survey results, we found credit conditions have tightened. Banks are requiring more documentation and more collateral and have tighter standards in general, even charging higher interest rates.

“Meanwhile, the banks are saying they have enough cash on hand to lend,” Madden continued.

Comments from business owners, Madden said, suggest a reduced demand for credit. For example, most business owners and managers in the Upper Midwest say they are cutting back on employment, capital investment and acquisitions. “So they need to borrow less money,” Madden said.

With conditions in the business world tougher, Madden said, “banks are looking to make sure that they get paid back. Possibly in the previous cycle they might have lent too freely and now they are seeing higher write-offs. So they are tightening their credit standards. Peoples’ financial conditions have deteriorated slightly because of the downturn in the economy, so they are less credit worthy to borrow money.”

I asked to what extent he thought regulators are driving the tightening of lending standards. “I don’t get the sense this is regulatory driven,” Madden said. The Fed got “comments from hundreds of bankers surveyed and I think we got one or two comments regarding regulation, whereas most of it is just saying, ‘hey, that’s business.’”