Latest rate cut to help Americans save, not spend
By Richard Leong
NEW YORK, Nov 5 (Reuters) - The Federal Reserve's latest interest rate cut gives Americans a reason to cheer, but listen to Stacey Patterson, and she'll tell you to use the savings from the low rates to cut your debt, not spend it frivolously.
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``You have to learn to cut back,'' said Patterson, who had her own brush with credit card problems a few years back and is now a part-time credit counselor at Profina, a national non-profit agency that helps people solve their debt problems.
While Tuesday's rate cut, the Fed's 10th this year, is aimed at boosting an economy now almost surely in recession, consumers, strapped by hefty debt loads and rattled by the fallout of the Sept. 11 by hijacked airliner attacks, are more concerned with cleaning up their finances than with spending.
That's not to say Tuesday's half a percentage point rate cut won't line the pockets of American consumers, who are responsible for two-thirds of the country's economic activities. It will help them by cutting monthly payments on things like car loans and, especially, credit card.
But in the shaky economy worsened by the Sept. 11 airplane attacks on the World Trade Center and the Pentagon, those consumers, many of whom are actually having problems paying off bills, will now be more likely to use savings from lower rates to pare debts rather than to indulge in buying luxury items.
CONSUMERS OVERWHELMED BY SEPT. 11
Last week, the government reported that Americans spent 1.8 percent less in September than August, the biggest monthly drop in consumption since Jan. 1987.
At this stage of Fed's rate-cutting campaign, additional declines in rates benefit consumers in two ways: it reduces their monthly outlays and it improves companies' balance sheets, helping to prevent further layoffs, economists said.
``It's going to be an indirect effect on consumers through supporting businesses,'' said Lynn Reaser, chief economist at Banc of America Capital Management.
Despite a floundering stock market, Americans earlier this year brimmed with confidence over job security and the health of the overall economy.
But that wide-eyed optimism had eroded a bit before Sept. 11, and was all but wiped out after those attacks, which killed nearly 5,000 people and led to a rapid acceleration of job cuts -- notably in the airline and hotel industries.
``The consumers have been overwhelmed,'' said Mark Zandi, chief economist at Economy.com. ``They are not going to be spending more. They are going to get their debt burden down.''
Americans, the most indebted in nearly 15 years, were already having problems meeting their debt obligations prior to the Sept. 11 attack. With an economic rebound unlikely in the near future, consumers are clearly on the defensive, trying to mend their free-spending ways ignited by the stock and housing booms of the late 1990s.
``There's no doubt that we are going to to see an increase in household financial problems into next year,'' Banc of America's Reaser said. But Reaser added that the Fed's rate cuts, plus falling energy prices should provide consumers with some financial cushion.
Bond rating agency Standard & Poor's credit card delinquency index rose to 5.07 percent in August vs. July's 4.86 percent. The index hit its highest level since 5.10 percent in February.
DIGGING OUT OF A HOLE
Fearful of losing their jobs, Americans now seem ready to put away their credit cards, and live more frugally.
``Sept. 11 clearly had a big effect on consumers,'' said Keith Leggett, senior economist at the American Bankers Association. ``When you're hearing about layoffs, this is causing anxiety among consumers. They are doing what they can to improve their personal finances.''
Bracing for rockier economic times, consumers have been socking away money, saving at levels not seen in nearly three years, according to the U.S. Department of Commerce.
Moreover, Americans have reined in their appetite to borrow. Since this spring, increase in consumer loans slowed after registering double-digit growth in the first three months of the year, according to the Federal Reserve.
Stacey Patterson is a living example that getting control of one's finances is entirely possible. Two years ago, the 27-year-old counselor at Profina was stuck in a $15,000 hole of credit card debt which amounted to half her annual salary.
But, resolved to stop her debt from eating away her entire paycheck, Patterson enrolled in Profina's credit management program. Since then, she has been able to negotiate lower interest rates and cut her credit balance in nearly half.
``I'm counseling them because I've been there.'' said Patterson, who has been a debt counselor with Profina for five months. ``Nine of 10 they join after I speak with them |
