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Consumers in No Rush to Borrow in Extended Low Rate Environment

The ""Federal Reserve's"":http://www.federalreserve.gov/ recently-announced commitment to keep interest rates low until 2015 isn't doing much to persuade consumers to borrow, according to ""Bankrate's Financial Security Index"":http://www.bankrate.com/finance/consumer-index/financial-security-poll-1012.aspx for October.

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The survey bounced from 96.6 in September to 99.2 in October-a solid increase, but still short of positive territory (a number less than 100 indicates falling financial security compared to the same time last year).

Most telling was consumers' response to Bankrate's ""wild card"" question of whether or not the Fed's pledge on interest rates would spur them to borrow money: 74 percent of consumers said they are not interested in taking on debt, while 23 percent said they are more inclined to borrow. Three percent said they did not know.

While the Fed's announcement was intended to stimulate economic activity, it may have had the opposite effect, one expert told Bankrate.

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""If anything, the effect of the announcement itself would be to reduce borrowing today,"" said Bill Hampel, SVP of research and policy analysis and chief economist for the ""Credit Union National Association"":http://www.cuna.org/. ""Some people may want to borrow now because credit is so cheap, but you've just told them you don't need to rush out and borrow now because it's going to be cheap next quarter, next year, the year after that and the year after that.""

Hampel added that, even in normal times, consumer loan demand is rarely affected much by interest rates. Rather, demand tends to be influenced by consumer confidence, which is still limited by an uncertain economic climate and falling household income.

""In today's environment, it's upside down: Incomes are falling. So, when incomes are falling, people worry, ‘How am I going to pay it back if I borrow?' no matter what the interest rate is,"" said Robert Barone, economist, portfolio manager, and partner at ""Universal Value Advisors"":http://www.universalvalueadvisors.com/ in Reno, Nevada.

Adding to the problem is the amount of debt accrued in the household sector. The most recent numbers from the Fed show total household debtâ€"including mortgage and nonmortgageâ€"is at 103 percent of disposable income.

With debt so high, the Fed is hoping to free up spending by giving consumers a low mortgage interest rate at which they can refinance, Hampel explained. However, with the bank committed to keeping rates low until 2015, Bankrate says customers may not be motivated to borrow until the 2015 deadline is almost up.

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.
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