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Duke Says Recovery May Be Slower on Households’ Caution

Federal Reserve Governor Elizabeth Duke said that baby boomers, the generation nearing retirement, are less likely to spend any gains in wealth than in 2007, potentially holding back the recovery in consumer spending.

“Some of the effects of recent economic turmoil may result in a longer period of economic adjustment than has been the case in past recessions, as fundamental attitudes appear to have shifted,” Duke said today in a speech in Richmond, Virginia, citing data from the Fed’s Survey of Consumer Finances released today.

The survey, which showed the median family’s wealth dropped to $96,000 in 2009 from $125,000 in 2007, highlights how the fallout from the longest U.S. recession since the Great Depression has impeded Fed efforts to return the economy to full employment and self-sustaining growth.

While Chairman Ben S. Bernanke is counting on record monetary stimulus to increase asset prices and boost the economy, Duke said that “boomer families remained cautious, or grew more cautious, about spending out of their asset gains -- regardless of whether they experienced significant losses during the crisis.”

Duke didn’t discuss forecasts for the U.S. economy or her outlook for monetary policy in her prepared remarks. She spoke to the Virginia Association of Economists.

The recession, which lasted from December 2007 to June 2009, was accompanied by a 57 percent drop in the Standard & Poor’s 500 Index and a 32 percent drop in home values, according to an S&P/Case-Shiller index of prices in 20 cities.

‘Boom Years’

“In the boom years leading up to the crisis, many economists believed that increases in wealth, especially increases in home equity, helped fuel consumer spending,” Duke said. Following the recession “every wealth-change group reported being more than twice as likely to decrease spending if asset values declined than they were to increase spending if asset values rose.”

“This evidence may help explain the sharp drop in consumer spending as household wealth declined and the continued sluggishness of consumer spending even as asset values have recovered,” Duke said.

She also discussed implications of the data for small business owners. “Only 82 percent of the consumers who reported owning a business in 2007 also reported owning a business in 2009,” she said.

Gaining Wealth

Business owners who were gaining wealth and those losing wealth were equally likely to be denied credit, a result that suggests “business credit was hard to obtain even for good borrowers,” she said.

The survey underscores that “the banks that are in a position to have the ability to ramp up business lending are in a very good situation right now,” Duke said in response to audience questions. “Small business lending is a place where you can really get better customers, where you can get market share.”

The central bank conducted the survey every three years beginning in 1983. The Fed shortened the period to two years for the 2009 survey to determine how individual and family finances have weathered the downturn.

Duke, 58, who joined the Fed in August 2008, has voted with the FOMC majority on every interest-rate decision. Before being appointed to the central bank, she was a banker for more than 30 years, almost all in Virginia, and was the first woman to chair the American Bankers Association.

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