The Fed Is Out Of Ammunition

On today’s show we are talking about how the arsenal at the Federal Reserve’s tool chest is getting empty.

The Fed is taking the approach of monitoring the situation closely. Fed officials at their meeting last week left their benchmark federal-funds rate steady in a range between 1.5% and 1.75% and signaled little reason to change course for now.

Fed officials had signaled before the coronavirus outbreak that they saw greater risks of surprises that could force them to lower rates than to lift them.

Americans are driving the US economy along with borrowed money. The question is how much longer can it last?

Consumer debt surged once again in December as Americans charged up their credit cards for the holidays. Total consumer credit grew by $22.1 billion in December, according to the latest data released by the Federal Reserve. That represents an annual growth rate of 6.3%. Total consumer debt now stands at a record $4.197 trillion.

Just 5 years ago in 2015, consumer debt was a record $3.4 trillion dollars. Back then, we were all saying “How much higher can it go?” This is unsustainable. Here we are 5 years later with an additional $800 billion in consumer debt.

The Fed consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

A big jump in credit card balances drove the big rise in consumer debt in December. Revolving credit was up 14%. Americans have run up nearly $1.1 trillion on their plastic. The big jump in credit card debt reversed a trend of slowing consumer borrowing, but this was not unexpected during the December holiday shopping season.

Non-revolving credit, including auto loans and student loans, grew by 3.7% in December. Total non-revolving debt outstanding stands at just under $3.1 trillion.

Through 2019, consumer debt grew by $187 billion, a 5% increase. Americans are driving the US economy along with borrowed money.

So if incomes have not grown by 5%, and inflation is low, some would say worryingly low, and consumer debt has grown by 5% and the economy grew by 2%, then there is only one possible conclusion.

America is spending money it doesn’t have.

The Traditional methods for stimulating the economy have relied upon the federal reserve lowering interest rates. The slow down in the economy is not the result of lack of investment by business. Lowering interest rates will have zero impact on economic growth.

It won’t have much of an impact on consumer spending either. Even if consumer interest rates fall, the ability of the consumer to sustain higher levels of debt is highly questionable.

The only economic stimulus weapon left is fiscal stimulus. That’s code for government spending more money and hoping that the increase in spending will circulate through the economy.

Well folks, don’t get ahead of me. This is an election year and you can bet that the White House wants to stretch out this economic expansion as long as it can.

Government spending is the only weapon left and you can expect them to use it.

The White House released their budget for the upcoming fiscal year. The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project.

The major elements of the budget plan are unlikely to become law, as Democrats control the House and spending bills in the Republican-led Senate need bipartisan support.