Or an alternative titles:“Warsh and the Fed are Irrelevant” or “American Consumers are Insane”
There’s a lot to say about the politics of the Fed, but a contact of mine in Trump-world told me the way these guys understand political success or failure is pretty simple. Are the wages of middle class Americans increasing? That’s it.
In other words, Warsh’s job is to make sure the public likes Trump’s economy. And that’s tough. In Trump’s first term, people were happy with the economy, this time they are not. In fact, if you judge solely by consumer sentiment, Trump’s first term was the third best economy Americans experienced since 1960. Trump’s second term is not only worse than his first, it is the worst economic management ever recorded by this indicator.
Americans were genuinely getting rich in ways they hadn’t experienced in decades, and they did experience a horror show under Joe Biden. It also explains why Trump is so unpopular today, with Americans complaining about the economy in a way they didn’t in his first term.
This observation isn’t a commentary about Biden or Trump, but about a structural change in the economy. You can see how people think about economic growth itself has shifted. Here’s the relationship between growth and consumer sentiment. They used to rise in parallel, higher growth meant more consumer confidence, but they started breaking down in the mid-2010s, and fell apart completely post-Covid.
Growth has been pretty good from 2021-2025, but the public is really mad.
What’s odd is that wages are increasing today about the same as they were in Trump’s first term
I think Warsh has a rough task, because the models underpinning how policymakers think about the economy just don’t reflect the realities of modern commerce. The fundamental dynamic is that those models were constructed in an era where America was one discrete economy, with Wall Street and the public tied together by the housing finance system. But today, Americans increasingly live in tiered bubbles that have less and less to do with one another. Warsh will essentially be looking at the wrong indicators, pushing buttons that are mislabeled.
While corporate America is experiencing good times, much of the country is experiencing recessionary conditions.
Inflation, according to the Consumer Price Index, is low at 2.6.% over the past year.
Behavioral economists and psychologists have all sorts of reasons to explain that people don’t really understand the economy particularly well.
In 2023, I noticed that the consumer price index, the typical measure of inflation, didn’t account for borrowing costs, so the Fed hike cycle, which caused increases in credit card, mortgage, auto loan, payday loans, et al, just wasn’t incorporated. The public wasn’t mad at phantom inflation, they were mad at real inflation that the “experts” didn’t see.
But while income inequality matters, I’m not totally sure it captures what is happening. More inequality would cause people to feel that the world is unfair, but in a world with higher real income growth, it wouldn’t cause working people to be unable to afford what they could buy the year before. Yet they constantly report feeling pinched.
Business sectors have concentrated over time less and less competition. Stoller Opines that while interest rates have raised; interest rates on savings have correspondingly raised.
much of our economy is now based on intangibles - the fastest growing sector was software publishing. Is Microsoft moving to a subscription fee model for Office truly some sort of groundbreaking new product? It’s hard to say, while corporate assets used to be hard things like factories, today much of it is intangibles like intellectual property.
A boomcession, where the rich and corporate America experience a boom while working people feel a recession, is a very unhealthy dynamic.
the people in charge still use models which presume one economy and one relatively uniform set of prices, where “consumer spending” means stuff consumers want.
As inequality widens we have multiple tiered economies. How does the Fed effect those tiered economies?
I once noted a speech in 2016 by then-Fed Chair Janet Yellen in which she expressed surprise that powerful rich firms and small weak ones had different borrowing rates, which affected the “monetary transmission channel” the Fed relied on. Sure it was obvious in the real world, but she preferred theory.
