What it is
The wealth effect is an economic phenomenon where an increase in the perceived value of a household's assets, such as stocks, bonds, or real estate, leads to an increase in consumer spending. When people feel wealthier due to rising asset prices, they tend to save less and spend more, boosting economic activity. Conversely, a decline in asset values can lead to reduced spending as households feel poorer and save more.
Policymakers, including the Federal Reserve, consider the wealth effect when assessing the impact of monetary policy. For instance, lower interest rates can boost asset prices, creating a positive wealth effect that stimulates the economy. Conversely, rising rates might dampen asset values, leading to a negative wealth effect that slows spending. Investors watch asset market performance, like broad stock indices, to gauge potential shifts in consumer behavior driven by this effect.
Why it matters
The wealth effect explains how your investment returns or home value can influence your own and others' spending habits, impacting economic growth and inflation.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice