Manhattan buildings in New York City, U.S., August 5, 2025. REUTERS/Kylie Cooper

(Reuters) -Business loan demand from large and mid-sized U.S. firms strengthened by the most in about three years in the third quarter while demand from small firms was essentially unchanged from the prior quarter, a Federal Reserve survey showed on Monday.

But the survey also showed banks on balance continue to tighten terms of credit for firms of all sizes, albeit not by the margin seen earlier in the year, the Fed's quarterly Senior Loan Officer Opinion Survey showed. That dynamic may limit credit growth even as demand improves.

Nationwide Financial Market Economist Oren Klachkin said tightening lending standards in the face of rising loan demand "will blunt the boost to growth from the Fed's 50 basis points of easing in the last two months and make it harder for policymakers to support the job market."

The Fed last week cut interest rates by a quarter percentage point at a second straight policy meeting, but divided opinions among policymakers about whether inflation remains too steep or if the job market is weakening have blurred the outlook for another cut at its final meeting of the year in December.

Business loan demand had cratered earlier in the year in the face of significant policy shifts during the first months of President Donald Trump's second term in the White House, with particular uncertainty around tariff policies.

The Trump administration, since the spring, has struck preliminary trade agreements with a number of top trading partners and last week also reached a framework agreement with China that has restored a fragile trade truce between the world's two largest economies.

With the passing of the highest levels of uncertainty, loan demand has improved as shown in the survey results. Still, the survey showed the tariff policies have made banks more wary of extending credit to firms with significant trade exposure.

"Banks reported being more likely to approve (commercial and industrial) loan applications from both large and small firms with low trade exposures, and less likely to approve C&I loan applications from firms of all sizes with high trade exposures," a recap of the survey said.

(Reporting by Dan Burns; Editing by Himani Sarkar)