Household Wealth and Fed Policy

Posted December 19, 2019

Business Investment is weak in the United States despite the recent large corporate tax cuts. Household Consumption, however, is holding up. Relatively strong Consumption has enabled the economy to grow by an average of 2.4% during the first three quarters of this year.

Asset price inflation has played an important role in supporting consumption.  The new Macro Watch video takes a look at the Household Sector’s balance sheet to see which assets are inflating and by how much.  

This video demonstrates that it was a slowdown in asset price inflation that forced the Fed into its extraordinary Monetary Policy U-Turn, from rate hikes and Quantitative Tightening in 2018 to rate cuts and Quantitative Easing in 2019.  Trends in the Household Sector’s balance sheet also suggests that the Fed will be forced to continue pushing interest rates lower to keep the country from falling into recession.

With further rate cuts and, perhaps additional QE, the Fed should be able to keep the economy expanding for quite some time.  However, the closer interest rates fall to 0%, the greater the risks become.  That is particularly true since the Wealth to Income Ratio is at a record high, indicating that asset prices are already dangerously stretched. 

If the government does not intervene with significantly more fiscal stimulus before the yield on 10-year government securities falls to 0%, a new economic crisis is likely.

For all the details, Macro Watch subscribers can log in and watch “Household Wealth & Fed Policy” now.  The video is 11 minutes long with 27 slides that can be downloaded.

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