This hasn’t been your father’s recession.
Unlike other recent recessions which were relatively shallow and short lived, we won’t see a quick and full recovery from this one. A problem which, Sandra Pianalto, Cleveland Fed president, said yesterday, is one of the reasons that the recovery will be so long delayed. Read more
Interest rates are low. Consumer borrowing, however, is still expensive. So what are consumers doing?
Paying down their debt, says a report put out today by the St. Louis Fed. Households have reduced credit card debt by 3.5 per cent and mortgage debt by 2 per cent. The Economic synopses, written by William T. Gavin, St. Louis Fed Vice President, credits the spreads between interest paid on consumer savings (which is held down by low interest rates) and the cost of consumer borrowing (which remains relatively high.)
“Because interest rates on savings are so low, households have ‘saved’ by paying down credit card and mortgage debt.”
Of course, an alternative explanation is that the reduced mortgage debt (which has experienced its first year-on-year decline) is due to falling housing prices. Read more
As money pours out of money market funds, we ask whether equity levels are sustainable and if the return of property-backed debt is a cause for celebration. Food security is a rising international concern and Bill Clinton asks if we should use the unemployed to increase energy efficiency. Read more
At the risk of stating the obvious, I don’t think the Fed was expecting August retail sales to come in quite as strong as they did. One month’s data is not going to change the forecast very much, as Bernanke’s comments at Brookings imply. Still, it is interesting to think about this in the context of the savings rate.
Most Fed officials think the savings rate will stick roughly where it is now – about 4.5 per cent. Some see a serious risk that the savings rate will move higher in the coming months; others are pretty confident it will stay about where it is now. None of them as far as I can see are expecting the savings rate to dip lower from here. If – and it is a very big if - a run of data suggested that was happening it would have a big impact on the way policymakers think about the outlook into 2010.