As the Fed continues to boost short-term interest rates in the face of a lingering economic soft patch, many have wondered: Why is the Fed is so confident? Are Fed governors in denial or out of touch with the realities faced by households?
Alan Greenspan and other Fed governors insist that inflation is low, and some archaic measures such as the Consumer Price Index and Personal Consumption Expenditures index would indicate so. But ask any person on the street and they are likely to regale you with a laundry list of expenses that continue to climb at a rate exceeding the growth in the household’s income.
Similar optimism seems to surface when the topic shifts to consumer debt. As noted by Fed Governor Susan Schmidt Bies in a Sept. 30 speech commenting on household financial conditions, “total household debt grew at an annual rate of about 10 percent between the end of 1999 and the second quarter of 2004; in comparison, after-tax household income increased at a rate of about 5 percent.” Bies also referenced consumers’ appetite for debt by mentioning that “homeowners took out cash in more than one-half” of the mortgage refinancings of the past couple years.
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