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US borrowing climbs as consumers take advantage of low interest rates

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US borrowing climbs as consumers take advantage of low interest rates

The market was surprised to learn on Monday that US consumer credit rose by a staggering $19.6 billion, surpassing expectations of a mere $12.5 billion hike. Month-over-month, this represents an increase of 80 percent, a clear sign that demand for credit is on the rise. Monday’s Federal Reserve figures painted the picture of a more confident US consumer finally ready to capitalize on lower interest rates, spurred by the boost in household wealth emanating from recovering property values and improving stock prices.

On Friday the S&P 500 put up its biggest rally in three weeks, a trend that extended into Monday’s New York session. The S&P 500 climbed half a percent on Monday, closing North American trade at 1,640.46. The Dow Jones Industrial Average climbed another 89 points to close the day at 15,224.69.

Borrowing confidence is merely another indicator that US recovery is back on track. Monday’s upbeat borrowing figures are an extension of the rapid job and income growth in recent months, as well as a general rise in spending. US markets closed last week on a high after June employment figures showed the US economy added 195,000 payrolls last month, with average hourly earnings rising by almost half a percent. Last week’s data also showed a rise in merchandise and automobile sales, which explain the staggering rise in household borrowing.

Low borrowing costs and growing consumer wealth will continue to support economic growth ahead of the Fed’s 2013 stimulus tapering. The Fed is expected to swap stimulus for economic stability this year by scaling back its $85 billion monthly asset purchase program. Monday’s consumer credit report is another sign that significant policy changes are likely to commence before year’s end, as the US economy continues to show signs of stability. The Fed’s next move will depend largely on the unemployment rate and GDP growth. These two dominant factors will determine when, and in what capacity, the Fed can begin its rollback.

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