As end of Fed's 'free money' nears, consumers still likely to spend

Wed Dec 16, 2015 10:23am EST
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By Howard Schneider

KOKOMO, Ind. (Reuters) - Judged by how long it has been going on, the current U.S. economic expansion should be on its last legs, but the mood in this rebounding heartland auto town would not show it.

Fiat Chrysler Automobiles (FCAU.N: Quote) (FCHA.MI: Quote) has doubled its local workforce to 7,000 amid record industry sales, upscale apartments are being built or tucked into vacant factories, and new small businesses are opening along a quaint Main Street.

As the Federal Reserve meets to begin a likely turn towards higher interest rates, the buzz in places such as Kokomo is one reason policymakers think the U.S. recovery has room to run. This city of 57,000 was hit hard by the recession, but the dynamic developing here is one the Fed sees nationally: more jobs gradually translating into higher wages, and wage growth translating into spending.

"Seven years ago this was considered one of the 'dyingest' cities in America," with mainstay auto companies teetering on the brink and people leaving for Indianapolis to the south and Chicago to the north, said Sandra Young, owner of the Main Street Cafe.

She opened three years ago, and now sees a booming corporate catering trade as a good omen that companies and individuals are confident.

"Budgets aren't so tight," she said.

Compared to other recoveries this one is arguably past middle age, and the Fed has been unusually patient in nurturing it with interest rates held near zero. (Graphic:

Since World War Two the average expansion has lasted just under five years. This recovery has been going on for six and a half, and throughout that time the economy has struggled to move beyond modest 2 to 2.5 percent annual growth. As a result, the Fed has stayed put for a full seven years, about twice as long as the central bank usually waits to begin tightening.   Continued...

Employees work on the eight-speed transmission at the FCA US LLC Kokomo Transmission Plant in Kokomo, Indiana on March 17, 2014.   REUTERS/Fiat Chrysler/Handout via Reuters