Rate hike likely won’t jar consumers

Federal Reserve chair Janet Yellen has a lot to worry about as she gets ready to raise interest rates for the first time in almost a decade. One concern she may be able to put aside: spooking U.S. shoppers.

Consumers, whose spending accounts for almost 70 percent of the U.S. economy, aren’t as sensitive as they used to be to declines in the value of stocks and bonds that typically follow an increase in interest rates, according to economists at JPMorgan Chase & Co. and Moody’s Analytics.

“Asset prices have been rising over the past few years, and we haven’t seen a big consumption boom, so we’re not expecting a big decline if asset prices go down,” said JPMorgan economist Jesse Edgerton.

Edgerton and colleague Michael Feroli calculated that the so-called wealth effect, the effect of changes in household wealth on spending, is only half as strong as it was before the 2008-2009 recession.

For every extra dollar in wealth since early 2008, consumer spending has risen by 1.7 cents, they estimate. That’s down from 3.9 cents in the period from 1952 until the last expansion ended in December 2007.

Several drivers could be causing the decline, among them reluctance to count on stock market gains after watching prices plummet in the Great Recession. Additionally, growing inequality has left financial assets concentrated in fewer hands.

Regardless, the reduced wealth effect matters as a Fed rate increase approaches: Tightening monetary policy can drive asset prices down, making consumers’ portfolios less valuable.

“Usually right around the first rate hike, the stock market doesn’t do very well,” said Ryan Sweet, director of Real-Time Economics at Moody’s Analytics in West Chester, Pa. This time, with the diminished wealth effect, “a garden-variety correction, I don’t think that would be a significant setback for consumer spending.”

Federal Reserve officials said last month that while conditions for raising interest rates were approaching, they need more confidence inflation is moving toward their goal, according to meeting minutes that prompted investors to reduce bets for a September liftoff.

Most meeting participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” according to minutes of the July 2829 Federal Open Market Committee session, released Wednesday.