Sunday, October 23, 2011

Fed's zero-interest policy has consequences

The Fed thinks it's wonderful American households are de-leveraging. With their zero interest-rate policy the Fed is clearly trying to induce Americans to pay down debt and/or spend, since ordinary savings earn no return.

However the Fed's Duke neglected to mention that U.S. student loan debt has reached nearly $1 trillion, with default rates at for-profit colleges rivaling sub-prime loans. All those poor students -- many of them U.S. troops -- believed the hype that "education is the key" to employment, and now they're in high water.

By Sarah Hutchins
October 22, 2011 | Reuters

Households' caution about taking on debt and spending will stand them in good stead when the economic recovery becomes more robust, a top Federal Reserve official said on Saturday.

Fed Governor Elizabeth Duke did not comment on the outlook for the economy or the monetary policy in a speech about financial planning.

Household debt-to-income ratios skyrocketed during 2001-2007, but households cut debt and spending significantly during the financial crisis that began in 2007, Duke said.

The declines in spending and borrowing reflect the weak economy, but also a greater aversion to debt and a desire to hold down debt levels.

"Going forward, as income and asset values recover, these improvements in the aggregate household position should be felt by more and more U.S. households.," she said.

The Fed cut benchmark interest rates to near zero almost three years ago and has bought $2.3 trillion in bonds to boost economic growth.

Recent data suggest the economy may have escaped slipping back into recession over the summer, but Fed officials will debate further steps to lower a high unemployment rate at their next meeting November 1-2.

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