For many Americans like the Yanuses, the thrill is gone. The vanishing wealth effect and the resulting falloff in consumer spending will be on the table Tuesday as Federal Reserve policymakers meet in Washington to review interest rates. With retailers and auto dealers reporting sluggish sales and corporations warning of disappointing profits, economists say the Fed will abandon its long-held view that the greatest risk to the economy is runaway inflation. Instead, the Fed is expected to shift at least to a neutral stance that recognizes the threat of an excessive slowdown as equal to that of inflation. The Fed could even adopt a stance that the greater risk is that the economy could slow too much.
Economists disagree over whether the wealth effect is dead.
After all, home prices are still high, and even with the market plunge, many long-term investors are still a lot richer than they used to be. But many consumers who cashed in stock to buy big-ticket items no longer feel flush enough to do that. Spending spree may be over Interviews with consumers around the country suggest that the market-driven shopping spree may be over. Americans would have made without hesitation a year or even six months ago are on hold. Van Roekel says wistfully.