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Not clear why Fed in rush to tighten, Sufi says

Something besides inflation must be motivating central bank, economist says

University of Chicago

Amir Suf says he doesn’t see inflation pressure in U.S. economy

Amir Sufi is one of the brightest young stars in the economics profession.

An economics professor at the University of Chicago, Sufi is co-author of the book “House of Debt” called the best economics book of 2014 by former Treasury Secretary Larry Summers . In it, Sufi and his co-author Atif Mian of Princeton, argued that the financial crisis was caused by overly indebted households.

In an interview with MarketWatch, Sufi discussed the outlook for household debt, especially student loan and subprime auto loans, the housing market and his slightly renewed optimism about the economy. He said he thought a mid-year Fed rate hike was a bad idea given the lack of inflation pressure.

The interview has been edited for length.

MarketWatch: What is the state of U.S. household debt in the early months of 2015?

Sufi: Well, one good thing is that just the overall household debt level of the U.S. household sector has been reduced significantly, and especially on the mortgage side, which is basically a dead market when it comes to kind of lower-up-to-middle-class Americans getting mortgages from outside the Fannie Mae, Freddie Mac channel. The two markets people are more concerned about are student loans and auto loans.

MarketWatch: Let’s go through those one at a time – starting with student loans.

Sufi: The student loan market is a bit of a strange market because the main creditor is the United States government. So even if defaults were to rise in that market, it would mean a hit to the budget, but it is not obvious it would lead to a financial crisis or any kind of wide-scale banking problems. My view on student debt is that the bigger problem is just the drag it has on the economy, especially when it comes to the household spending behavior of younger Americans. When you look at the data, it is just striking what the Great Recession did to people between the ages of say, 25 and 40. I think there is increasing amounts of evidence that student loan debt is holding back auto spending, home ownership, and general economic activity. The problem is not so much of a bubble that is about to burst and cause a lot of defaults, it just that it has this drag on the economy.

MarketWatch: Is there a better way to go about funding higher education?

Sufi: One of the things we propose in our book is to take seriously the idea of more restructuring of student debt, either explicit principal forgiveness for people that graduated in the midst of this terrible economic downturn, or, probably more palatable, is something like allowing people to refinance into much lower interest rates, something, for example, Sen. [Elizabeth] Warren has proposed. That makes a lot of sense to me.