Federal Reserve Governor Elizabeth A. Duke today echoed others at the Federal Reserve, saying that she expected a “moderate” recovery in economic activity in 2010, and that businesses would “cautiously” begin to add jobs. And she, like others, said that the recovery depends largely on improving credit conditions.
“In my view, the outlook for economic activity depends importantly on our ability to build on the progress to date in improving the operation of financial markets and restoring the flow of credit to households and businesses,” she said in a speech in Raleigh, North Carolina.
Her stance is nothing new for the Fed, and she’s the third governor to repeat the sentiment in the past few weeks. Yesterday, Donald L. Kohn, Vice Chairman, said: “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow.” And in December Ben Bernanke cited tight credit as one of the “formidable headwinds that seem likely to keep the pace of [economic] expansion moderate.”
But Ms. Duke also stated the flip side: better access to credit for consumers will only boost the economy if they are still willing to take on the debt.
“[One] risk I see to the outlook for household spending is the possibility of a rise in the personal saving rate as consumers choose to shore up their balance sheets rather than spend. While good in the long run, increased saving means consumers are providing less of a short-run boost to the economy,” she said. Ms. Duke points the significant drop in loans on banks books and unused credit lines at commercial banks from their peaks. But then, the peaks came as underwriting standards declined to a level we’re unlikely to see again.
