Ultra-accommodative Monetary Policy and Unintentional Drags on Consumer Spending

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.