Federal Reserve Bank Policy and Influence of US Excessive Current Consumption on International Equity Returns

Evidence is mounting that the current consumption and investment tradeoff by US investors predicts future equity returns, both domestically and internationally. This paper examines the reward to investors for bearing the risk associated with the consumption‐investment decisions of investors. In addition, the paper finds the reward is consistent in periods of rising and falling short‐term interest rates resulting from Federal Reserve Bank monetary policy. The findings confirm a positive return is associated with assuming the risk associated with the consumption and investment tradeoff in equity investments into developed markets.