American share prices plunge during April and May. Figures for consumer spending from April to June show a sharp slowdown. Mere coincidence? Or proof of the existence of the "wealth effect"? During the long bull market in shares, the idea that changes in the stockmarket directly lead to changes in consumption has moved to the centre of macroeco-nomic policy debate. Alan Greenspan, chairman of the Federal Reserve, justified hefty interest-rate rises early this year by pointing to the wealth effect of soaring shares. Since then, he has hinted that the need for higher rates has now diminished, in part because of the "flattening in equity prices, on net, this year".
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