Fed assesses stock loss effects on consumers

Associated Press

WASHINGTON — Federal Reserve Chairman Alan Greenspan said Friday that policymakers are being challenged by dramatic gains and losses in the stock market and less volatile movements in home prices.

The challenge, he said, is for policymakers to try to better understand how gains or losses on stock investments and in home values affect consumers’ willingness to spend.

Consumer spending accounts for two-thirds of all economic activity and has been a main force propping up the struggling economy. The yearlong economic slowdown has led to a slide in the stock market. But home values, for the most part, have gone up.

"There can be little doubt that sizable swings in the market values of business and household assets have created important challenges for policymakers," Greenspan said in a speech delivered at the Fed’s annual retreat in Wyoming’s Grand Tetons. The text was distributed in Washington, D.C.

To assess how gains or losses from different types of assets — a stock vs. a home — affects consumer spending and thus the overall economy will require more analysis by policymakers, Greenspan said.

"To answer these questions, we need far more information than we currently possess about the nature and the sources of capital gains and the interaction of these gains with credit markets and consumer behavior," he said.

Economist Richard Yamarone of Argus Research Corp. said knowing more about how these things relate could give the Fed helpful information when conducting monetary policy.

"It is especially important, at least now, that the Federal Reserve better understand and capture the relationship between consumer spending and the changes in the stock market and home wealth," Yamarone said. "The volatility of the housing and stock markets have been unprecedented over the past decade, making monetary policy extremely difficult to implement."

On Wall Street, stocks rose, buoyed by news that factory orders rose in July. The Dow Jones industrial average was up 36 points and the Nasdaq gained 7 points in morning trading.

Over the past year and a half, Greenspan said home values have appreciated, while stock values have contracted significantly.

"In such circumstances, differences in the propensities to consume out of the capital gains and losses on different types of assets could have significant implications for aggregate demand," he said.