Federal Reverse Recap: Steady Inflation Expected, Labor Market Concerns

Households are slowly (re)leveraging, but their net worth is down.

The report tells a terrifying tale of living high and paying the price for American households. In the years before the financial crisis, in 2005 and 2006, household debt increased 11.1 and 9.8 percent, respectively. But for three years after the Lehman Brothers crash, household debt fell—in part because people defaulted on mortgages and other debt in huge numbers. In the second quarter of 2012, household debt climbed modestly, at a 1.2 percent annualized rate—the biggest increase since early 2008.

The corporate sector can’t get enough of cheap debt.

Businesses saw their debt rise at a 4.9 percent annual rate in the second quarter of 2012, similar to 2011’s 4.7 percent jump. (In 2007, by contrast, businesses’ debt rose 13.6 percent.) In June, total nonfinancial business debt stood at slightly below household debt, at $12 trillion.

Government debt tells two stories.

In the second quarter, state and local debt increased at a $23.6 billion annualized rate—a measly 0.8 percent. That actually reverses a decline—at an annualized rate of $37 billion—in the first quarter. Since the end of 2008, state debt has been going up and down, while federal debt continues to climb ever higher. In the second quarter, it rose at a 10.9 percent annualized rateto just over $11 trillion in total.

Federal Reserve officials spoke on (9/20) and here is a some things they had to say:

James Bullard – St. Luis Fed

Sees reduced US growth for many years and said it’s unclear if labor market is facing structural challenges. Also noted Fed has room to maneuver on inflation and should take a balanced approach and would have voted against QE3.

Narayana Kocherlakota – Minneapolis Fed

Hoping for 7.5% unemployment by end of 2013 and sees zero Fed rate until 5.5% unemployment is achieved. Would like to speed move to full employment and back zero rates while maintaining price stability. Also said would have voted for QE3.

Sandra Pianalto – Cleveland Fed

Sees inflation at or below 2% for years to come and that the recovery has been frustratingly slow while QE3 may provide reduced stimulus than previous bond buying. Sees potential risks in monetary policy.

Eric Rosengren – Boston Fed

Sees 2% inflation as the target, not a ceiling. Also sees improvement in the housing market and would like economic growth higher than 2%. Expects QE3 to reduce the unemployment rate by a few tenths and hopes the Fed doesn’t have to do QE3 for very long. Also noted renewed confidence among business leaders and doesn’t expect severe problem in Europe or China.

Dennis Lockhart – Atlanta Fed

Suggested 150,000 monthly job gains would be needed to cut unemployment rate and noted a remote risk of serious inflation. Also expects modest growth to continue while 2013 should look better than 2012. Said risks associated with QE3 are manageable, however most worried about the fiscal cliff.

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