Ultra-accommodative Monetary Policy and Unintentional Drags on Consumer Spending

Xing, Victor (2016): Ultra-accommodative Monetary Policy and Unintentional Drags on Consumer Spending.

Abstract

New York Fed President Dudley recently commented that “real consumer spending growth appears to have moderated somewhat from the relatively robust pace of the second half of 2015” (Dudley, 2016). While this may suggest headwinds from cyclical economic conditions, there are emerging signs that ultra-accommodative policy also acts as a constraint on consumer spending via income effects. Instead of inducing savers to spend and borrow, rapid asset price appreciation as a result of monetary easing have outpaced wage growth, and pass-through services inflation subsequently reduced discretionary income and forced already-levered consumers to save instead of spend. This unintended consequence worked against accommodative policy’s desired substitution effects and suggests further easing would likely yield diminishing results if asset price appreciation continues to outpace real income growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Quantitative Easing, Malinvestment, Consumer Spending, Involuntary Renter, Asset Price Inflation, Financial Conditions, Wage Growth
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

References

Charette, A., Herbert, C., Jakabovics, A., Marya, E. T., & McCue, D. T. (2015). Projecting Trends in Severely Cost-Burdened Renters: 2015–2025. Retrieved from https://s3.amazonaws.com/KSPProd/ERC_Upload/0100886.pdf

CoStar Group. (2016). Composite Price Indices for Commercial Real Estate Soared in 2015. Retrieved from http://www.costargroup.com/costar-news/details/composite-price-indices-for-commercial-real-estate-soared-in-2015

Dudley, W. C. (2016). The National and Local Economic Outlook: An Update. New York: Federal Reserve Bank of New York. Retrieved from https://www.newyorkfed.org/newsevents/speeches/2016/dud160408

Federal Reserve Board of Governors. (2015). Report on the Economic Well-Being. Retrieved from http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf

Gale, W., Harris, B., Renaud, B., & Rodihan, K. (2014). Student Loans Rising, An Overview of Causes, Consequences, and Policy Options. Retrieved from http://www.brookings.edu/~/media/research/files/papers/2014/05/student%20loan%20debt%20rising%20gale%20harris/student_loans_rising_gale_harris_09052014.pdf

Hatzius, J., Hooper, P., Mishkin, F., Schoenholtz, K. L., & Watson, M. W. (2010). Financial Conditions Indexes: A Fresh Look after the Financial Crisis . Retrieved from https://research.chicagobooth.edu/igm/events/docs/2010usmpfreport.pdf

Searcey, D. (2015). More Americans are Renting, and Paying More, as Homeownership Falls. The New York Times. Retrieved from http://www.nytimes.com/2015/06/24/business/economy/more-americans-are-renting-and-paying-more-as-homeownership-falls.html?_r=1

Stein, J. C. (2013). Speech at the "Banking, Liquidity and Monetary Policy," a Symposium Sponsored by the Center for Financial Studies, Frankfurt, Germany. Retrieved from https://www.federalreserve.gov/newsevents/speech/stein20130926a.htm