KC Fed's George: Consumers Reluctant to Borrow Despite Low Rates

OMAHA — There is a reduced appetite for debt among U.S. consumers, while corporations are focused on rebuilding their balance sheets and are held by uncertainties such as future fiscal policy, despite the aggressive actions by the Federal Reserve to keep interest rates at exceptionally low levels, Kansas City Federal Reserve Bank President Esther George said Tuesday.

Speaking to students and faculty at the University of Nebraska-Omaha, George described the economy as growing slowly and in "an uneven manner". She noted that most people expect 2% growth for economy this year, and the unemployment rate, at 7.9%, to come down very slowly.

George holds a voting position on the Fed's policymaking Federal Open Market Committee this year, a group that has vowed to keep short-term interest rates at exceptionally low levels so long as unemployment remains above the 6.5% threshold and inflation doesn't hit 2.5%.

She argued, however, that the U.S. consumer has suffered a "very sharp loss of wealth" and the priority is now on deleveraging and shedding debt accumulated prior to the financial crisis and recession.

The percentage of consumers taking on more debt has dropped sharply, and as a result, "record low interest rates are not enough" to induce some borrowers to take on more debt, George said.

In addition, business remain cautious, despite holding "record amounts of cash," as their focus is on repairing their balance sheets, not to mention the yet-unresolved fiscal uncertainty.

The Fed's action over the past few years have provided "an unprecedented" level of monetary accommodation and promises to continue this aggressive pace in the coming years, even after the recovery takes hold, she said.

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