Consumer Comeback Blog

U.S. Fed Says Tight Credit Holding Back Economy

Banks’ refusal to lend to people with less-than-perfect credit is slowing down the economic recovery by hindering consumer borrowing and spending, reported Reuters. The report is based on a recently released study from the Federal Reserve Bank of San Francisco.

The study, which was published on Aug. 20 in the bank’s Economic letter, shows that the ongoing sluggish economic sluggish is not because of consumer demand but because of a lack of credit supply. According to a report from the Deutsche Borse Group, the changes in the credit supply are working at an aggregate, or national, level instead of at a regional level.

The report came 10 days after San Francisco Federal Reserve president John Williams gave a highly publicized interview to the San Francisco Chronicle in which he called for a third round of stimulus known as quantitative easing, or QE3. As recently as May, Williams said he was opposed to another round of quantitative easing; however by June Williams’ position seemed to be softening.

Quantitative easing is an unconventional step in which the Federal Reserve attempts to bring down long-term interest rates by buying treasury and mortgage-backed bonds. The action, which has already been undertaken twice before, is designed to encourage borrowing, spending and investment, reported the Wall Street Journal.