Home Business Why the Fed is wary even in a booming US economy

Why the Fed is wary even in a booming US economy

In his State of the Union address this month, US President Donald Trump cited low unemployment and positive job creation in the manufacturing industry as evidence of an "economic miracle" in America.

But the Federal Reserve, which is pausing its interest rate hike plan for the time being, will most likely use other yard sticks to gauge the US economic situation.

For one, America is jeopardizing debt.

Mortgage, credit card, student loan and car loan total debt rose for the 18th consecutive quarter in the last three months of 2018, reaching a record high of $ 13.5 trillion. Of particular concern: a new report by the Federal Reserve Bank of New York on Tuesday said that more than 7 million Americans have achieved a heavy delinquency in their car loans.

The Fed's economists said that the rise in credit-financed borrowers, at least 90 days behind payments, is "surprising" given the strong labor market and the economy.

The following graph shows how big the American debt burden is.

AJ Bell

American consumers are "exposed to an unexpected loss of their job or an increase in interest rates," says Russ Mold, investment director at UK investment platform AJ Bell.

"This leaves the US Federal Reserve with every reason to be cautious with rising key interest rates, as the US is even more sensitive to minor changes in borrowing costs due to the higher debt stock."

America has never been so heavily indebted: on the state level, government debt surpassed $ 22 trillion on Monday when all public debt for the first time exceeded that threshold. As a percentage of gross domestic product, US debt is now around 215%. This could be a sign that the Fed is in a so-called "Japanese debt trap".

Japan's public debt is also about 200% of GDP.

Continue reading: The US budget deficit rose to $ 779 billion this year, the highest level since 2012, driven by Trump's tax law and the massive budget agreement

Schimmel outlines the cucumber in which Fed Chairman Jerome Powell might find himself:

"Powell's interest interruption could be an early symptom of this dilemma that has surfaced in Japan over the last three decades, and more recently in countries where interest rates should be raised, but quickly returned as economic growth slowed by an unwanted appreciation of the national currency, higher interest payments or both. "

Then there is the unemployment rate, which is close to lows that have not been seen since the 1970s and which is likely to increase, according to Mold. "Many Americans may be ill prepared for a bad wind."


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