The Week in Review: Scotland Votes, Fed Reserve Delays Rate Raising on Growing U.S. Poverty


Earlier fears of a sharp decline in economic growth and stock prices fell away as European investors dismissed risks of an independent Scotland and as the Federal Reserve indicated hesitation to raise interest rates on U.S. Treasuries.

In a two-day meeting of the Federal Open Market Committee, Federal Reserve members decided that the pace of slowing bond purchases would remain steady, with the U.S. Central Bank expecting to end its bond buying program before November. 

At the same time, Janet Yellen hinted that interest rates on the Federal Funds Rate would begin to rise later in 2015. On the pace of rate rises, Yellen said a lack of a “fixed mechanical interpretation of a time period” left the Fed freedom to respond to labor market conditions, which remain weak. Yellen suggested that the Federal Funds rate could rise to 1.375% by the end of 2015, later than analysts had previously expected.

Citing slow growth and the need for accommodative monetary policy to offset weakness in the labor market, Janet Yellen said that the Federal Reserve had enough room to keep the Fed Funds Rate at 0.25% in the short term, which in turn would keep yields on short-term and medium-term Treasuries low. Long-term bonds pared earlier gains on the news, while U.S. stocks rallied.

Move Impoverished Americans Increase Borrowing

In addition to declining labor participation, stagnant wages, and a lack of job growth acceleration, the Federal Reserve has also observed increasing indebtedness amongst the poorest Americans. This rising debt load is resulting in low aggregate demand, as Americans have less disposable income net of debt payments and debt servicing costs to spend on consumable and discretionary goods.

According to the Survey of Consumer Finances, a survey released recently by the Federal Reserve, families in the lowest 25% income bracket have substantially more total debt than at any point in history, with the average debt holding per family at $47,000. While that per-family level is slightly below the peak in 2010, it is higher than before the subprime financial crisis. At the same time stock holdings, home equity, and other assets are not rising to offset growing debt loads.

In a separate report, the Federal Reserve noted that capacity utilization, which measures actual industrial output relative to total possible output given the investments and infrastructure in place, has fallen to below-average levels. Some economists have predicted lackluster capacity utilization is likely to remain, as low demand discourages greater investment amongst manufactures and industrial firms.

Europe Rally as Scotland Dismissed

Before Scotland’s vote was tallied, European stocks rallied amid growing signs that the European Central Bank would begin a more aggressive monetary policy. A growing number of European economists are predicting the ECB’s asset-backed purchasing program to grow in 2015. Stocks rallied on the news across the continent.

Despite previous fears that a Scottish independence vote could cause greater instability across the continent by encouraging more separatist movements to undermine the European Union, investors ignored the vote on Thursday by focusing instead on an expanding monetary base in the eurozone that could boost equity investment across the continent.