Debt Free

First of all – A moment of remembrance for those who lost their lives, were hurt or lost a loved one on September 11^th 6 years ago, and a moment of thanks for those brave men and women serving their country in the U.S. armed forces today.

It seems that even within the Fed, there are differing opinions on the direction faced by the U.S. economy and risks faced by consumers (you) in the coming year. If the esteemed directors of our federal reserve bank can’t agree on where we’re going economically, how are you supposed to plan for your financial future?

According to Fed Governor Frederic Mishkin and the head of the San Francisco Fed President Janet Yellen both seem to have a pessimistic outlook on our immediate economic future. Mr. Mishkin stated "consumer and business spending also could be damped as a consequence of the recent financial turmoil" The timing of such pessimism, directly before the traditionally busy Q4 retail season, might give consumers pause before they head out to max out their credit cards yet again. Keeping Americans from going even deeper into debt would be a good thing, but, in the short term could give rise to all manner of economic problems, especially when combined with the troubles faced by the lending industry of late.

Mishkin and Yellen may be basing their opinions on the Fed report from July indicating that consumer credit slowed substantially over the same period a month before. Overall consumer credit showed a 5.9% growth rate in June, but that plunged to a 3.7% clip for the month of July. The 37% decline in month over month growth in consumer indebtedness may actually portend increased health in consumer spending patterns, for as sure as the debt financed spending has driven the economy to new heights, it hasn’t helped many Americans personal financial picture. Even more ominous for many Americans personally, the revolving (credit cards, store accounts) sector of the consumer credit report indicated substantial growth (6.6%), while non revolving credit (HELOCs, mortgages, car loans) showed much slower growth, at 1.9%.

It seems too many feel leverage is the name of the game. Sadly, the majority are leveraging birthday presents, travel and new goods with which to fill up their homes. This is leverage to indebt, rather than leverage to enrich, a much more appropriate use of the most powerful of financial and business principles.

Within the Fed, there remain those who are hopeful on the direction of economy as a whole, however. Flying in the face of the pessimism shown by their partners in New York and San Francisco, the main man at the Dallas Fed office, Richard Fisher, indicated he was encouraged by the economic trends, and saw strong economic conditions in the future. Charles Plosser of the Philly Fed office seems to be feeling more like many of you, a bit confused about the direction of the U.S. economy in the near future. He indicated there was “conflicting data” about where the economy was headed.

If the Fed overcomes their confusion and lowers the interest rate an additional quarter next week, as many analysts and economists are foreseeing, where does that leave you, the consumer? If you are looking to get a mortgage or other consumer credit, and are able to qualify, it leaves you in a pretty nice position, actually. The interest rates for major types of financing continue to show declines for those who the lenders are allowing to qualify for credit. HELOCs are showing rates about a tenth below last week, mortgages of all types are showing at least that much of a decline, and auto loans edged slightly lower in the past week.

Those in the market for a vehicle may be able to grab one of the low interest financing deals that pop up at the end of a model year if they have no troubles driving a car at the end of the model year. When making your financial calculations before you buy a vehicle (you do work these things out before you buy, don’t you?), don’t forget to factor in the added depreciation you’ll experience because you are driving a vehicle that’s basically a year old as you drive it off the lot.

An additional drop in interest rates may give the stock markets a bit of a boost, although most investors have probably figured it into their market activity already. The aforementioned Mr. Mishkin votes on the Fed interest rate committee and if the Fed does cut rates, as most seem to be expecting, it could be time to take advantage of the lower interest rates for consumers, but not by boosting the amount of their credit card debt. If the remarks by Ed Hyman a few weeks ago turn out to be true, it could be just the latest in a continued string of Fed interest rate reductions.