As we have discussed several times in the past, the FED’s efforts to keep interest rates low will stimulate spending indirectly by increasing the “wealth effect” of American consumers who account for two-thirds of our economy. Americans generally feel wealthier when their home value and investment portfolio increase.
If Americans feel wealthier, they will spend more, thus stimulating the economy. As the economy heats up, more jobs are created, adding to household formations thus increasing real estate values again as well as lifting stock prices higher.
Report on REAL ESTATE: Almost all areas of the US are showing modestly higher home values. Some areas have witnessed increases over 15% during the past year. Source: Case Shiller Index.
Report on the US STOCK MARKET: The total stock market value now stands at $23 Trillion (a new all-time high) up from a mere $8 Trillion in March of 2009 (which had declined from $20 Trillion in October of 2007). Source: The World Bank.
CONCLUSION: the FED’s monetary policy of low interest rates is raising Americans’ wealth effect. As a consequence, we can expect moderate to high increases in consumption for the remainder of this year.