In its statement three weeks ago (September 18) announcing the first cut in interest rates in four years, the Federal Open Market Committee said “the tightening of credit conditions has the potential to…restrain economic growth.” Today's release of the Committee's minutes will go a little bit more deeply into the arguments for the rate cut and test the likelihood of a similar action when the FOMC meets at the end of this month.
The Committee was spooked by the report just 11 days before it last met that the economy shed 4,000 jobs in August. That employment report was revised last week to show a gain of 89,000 jobs in August, leading to suggestions the Committee might not have cut rates as sharply if it had the revised numbers.
But, what of “the tightening of credit conditions?” Was that assessment accurate?
The Federal Reserve itself reported last Friday consumer credit outstanding increased a whopping $12 billion in August – to $2.47 trillion — the largest month-month increase since May; in the last six months, consumer credit has grown $65.6 billion compared with $47.1 billion in the previous six months. Translated, that means debt for each household grew by $582 in the last six months, compared with $418 in the previous six.
Among the several possible explanations: there is no credit crunch — another argument that the FOMC may have acted too quickly in lowering rates — or the economy is in deeper trouble than we realize or acknowledge.
The August increase in household debt (excluding mortgages) came in the same month in which personal consumption spending rose faster than disposable (after-tax) income; disposable income was up $37.2 billion, but spending was up $54.8 billion. On a per household basis, each household, on average, spent $16 more in August than it took in, while household debt increased $107.
While the increased household spending is good news for an economy relying so heavily on consumption, the increased borrowing is not – especially when that additional borrowing is not used to expand spending. The increased borrowing is itself a sign of stress.
Since the Federal Reserve consumer credit report excludes real estate related debt, a dip or slow growth in credit card debt could mean homeowners have used less costly home equity or other mortgage debt to pay down higher interest credit card debt. With lenders – at the urging of regulators – tightening credit standards for mortgage debt in response to increasing mortgage foreclosures, it may be that escape route is closing.
A couple of weeks ago Fed Chairman Ben Bernanke in a closed door meeting with senior financial officials left at least one attendee with the impression he is more deeply concerned about the damage the housing meltdown could do to the rest of the economy than he has said publicly. The change in household debt supports that view.
Today's minutes will open the door a bit wider into the FOMC thinking.