Federal Reserve Board Chairman Alan Greenspan said Thursday he is not worried by high levels of credit card debt because issuers are charging interest rates steep enough to compensate for large losses.
Testifying before the Senate Banking Committee, Mr. Greenspan attributed most of the increase in consumer debt to the "extraordinary rise" in credit card issuance. Credit card companies fully expect big losses, he noted.
Nevertheless, he said he was encouraged that banks are beginning to rein in consumer debt levels. "We've observed some evidence from our loan officer surveys that banks are beginning to tighten up a little bit," he said.
Mr. Greenspan's comments were in response to a question by Sen. Richard Shelby, R-Ala., who noted that consumer debt is growing three times faster than income, and that consumer delinquencies are at a 15-year high. Following the hearing, Sen. Shelby said he would hold a hearing July 24 to examine the risks posed by deteriorating consumer credit quality.
Separately, Mr. Greenspan urged Congress to enact legislation to capitalize the Savings Association Insurance Fund this year. "The longer we wait, the more difficult it's going to be to get this resolved," he said. Thrifts will shift deposits out of their fund if Congress doesn't capitalize the SAIF fund, he said. "Clearly we're running up against an impossible, unstable situation."
Regarding the economy as a whole, Mr. Greenspan said he expects inflation to be less in 1997 than in 1996. He forecast inflation at 2.75% to 3% next year, down from 3% to 3.25% range expected this year.
The growth rate of real gross domestic product is expected to be between 2.5% and 2.75% during 1996 and between 1.75% to 2.25% in 1997. Despite the slower growth forecast, the Fed is willing to raise interest rates to fight off signs of inflation, he said.
Bank economists reacted favorably to his comments."Fears of dramatic rate changes should be dashed," said Nicholas S. Perna, chief economist at Fleet Financial Group.