Consumers Buying What Policy Makers Are Selling

The jump in a key component of the May consumer confidence report shows consumers' faith in government policy is on the mend

The sharp bounce in the "expectations" component of the May consumer confidence index to 86.8 in May from below 80.0 would suggest that consumers' faith in government policy is on the mend vis-a-vis actions taken to avoid a recession this year. The chainsaw employed on the Fed funds rate -- to the tune of 250 basis points inside five months -- should take most of the credit.

Congress and the White House, however, have finally picked up the policy baton with the front-loaded tax cut. Most of the 2001 tax cut takes the form of a drop in the tax rate applied to the new bottom bracket from 15% to 10%, but still means a rebate of $600 for most married taxpayers and $300 for singles. This will be paid out via a check in Q3 for a total of about $40 billion. Tax cuts in other brackets start this year, working out to roughly $100 billion for the next four quarters (the second half of 2001 and the first half of 2002) due to their retroactivity and special cuts (i.e child tax credit).

Realistically, though, the implied tax of higher energy costs could "cancel out" Bush's stimulus, according to former Fed Vice Chairman Alan Blinder -- one reason the Fed remains accommodative.