Data disconnects

Jason Furman @jasonfurman
If you're not a little confused about the economy you're not paying attention. Three of many historically large disconnects in the data:

1. Jobs growing & GDP contracting

2. Price growth rising & wage growth falling

3. Consumer sentiment plummeting & consumer spending rising

Is the Fed using the right tool or is it using its only tool?

Is the Fed the right actor for this situation?

As philosopher king, what would you be doing?

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About what?

Interest rates?

I would raise them .

I would keep raising them until they were positive. 2 percent over inflation. Anything less and you get misallocation of capital.

Unemployment needs to be 5 percent. All the other stuff needs to be taken care of within society or politically, not economically.

Mis allocation of capital is a sin that has terrible consequences.



Unemployment needs to be 5 percent.

Why is it that whenever someone proposes something like that, they never volunteer to be in that group?

  1. People are working harder and longer for ever more profitable companies.

  2. People are making less than they have before (inflation is outpacing wage growth) to purchase increasingly more expensive goods and services.

  3. People are rapidly becoming burnt out from it but there are bills to pay and necessities to provide so they keep doing it even though the idea of getting ahead is fading away.

My $.02


Is the Fed the right actor for this situation?

Likely not but they are the only ones functioning. It has been this way since the '08 crash. Maybe even before. Congress needed to do something but they did nothing. This meant the Fed either did what they could to keep the wheels on the bus, or let things crash. They decided to keep the wheels on the bus, even if it was not their job.

That may have been a mistake.

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Is the Fed using the right tool or is it using its only tool?

Yes using its only tool … which in this situation is the right tool, though they aren’t optimising things.

Is the Fed the right actor for this situation?

Yes in this sense - there is excess demand over supply. By decreasing asset prices, the Fed reduces the ability and desire of the rich to spend and leaves the middle (and working) class less affected.

The Fed’s only tool is monetary policy (interest rates and money supply) which operates largely through asset prices. So today it’s ideal to tighten … the problem has been the last decade+ when they were not the right actor, all they could do was further enrich the already rich producing trickle down, not help the middle class more directly.

The fine tuning I see being wrong is if they want asset prices down but not restrain the middle classes - they should be reducing the balance sheet faster. The whole thing should be in runoff. There’s 1.5 tr excess liquidity out there being lent back to the Fed in reverse repos … why are they piddling around with very slow balance sheet contraction when the inflation is there right now … and it’s been obvious at least all this year.

And why they have been so slow to hike … in January 1994 Greenspan did an intermeeting hike to get the message accross early … but this Fed is anything but the nimble actor they claim to be …

As philosopher king, what would you be doing?

Whole balance sheet in runoff NOW, get rates up to where they are needed NOW - hike the 1% tomorrow and another 50bp at the next metting … then wait.

While the resulting 3% or whatever rate isn’t positive real, the substantial change from zero is giving assets a push down and so reducing demand. Houses not selling at their recently inflated prices. Stocks and bonds down. [crypto well down :worried:]

And as today’s speaker Governor Waller noted, it’s the interest rate versus future inflation we need to watch, and if future inflation is assessed coming down already less high rates are needed. That’s why I suggest wait after another 1.5%.…

Not that I think he sees many of these subtleties …


Why is it that whenever someone proposes something like that, they never volunteer to be in that group?

It is not a proposal, it is what it is. I have been in that group and for a properly functioning economy this needs to be a dynamic pool of people moving from job to job and skill set to skill set.

Also, while we are talking hypotheticals, unemployment should be a lot higher. Like a lot higher. For a union craftsman, maybe half a 40 hour work week and there should be universal healthcare. In other words, moving in and out of work force should not be traumatic.

This allows the fluidity that an economy needs. But, we don’t have those tools and talking about it is no more than self gratification.



Is the Fed using the right tool or is it using its only tool

No. Yes.

Is the Fed the right actor for this situation?


Fiscal is the way to fix this, not monetary - but there is virtually no way we will get agreement on any fiscal policy - at least none that would matter.

Fiscal is the way to fix this, not monetary…

If all the Fed has is a hammer…

…and fiscal is political…

The Fed is Wall Street’s banks’ Trojan Horse.

The Captain

Is the Fed using the right tool or is it using its only tool?

The Federal Reserve is using the only “input knob” on the machine that it controls, which cannot correct the factors in the economy that are out of equilibrium. From a prior post:…

As Wendy pointed out, a key concern now is that the Fed seems intent on doing SOMETHING cuz by golly, their mission in life is to deliver “moderate” inflation (not too low to encourage bubbles, not too high to tank growth). Much of what we will be seeing won’t be caused by monetary decisions. Unfortunately, other players with knobs under their control don’t seem willing / able to tweak those knobs to adjust to the square wave changes in inputs. Since the Fed doesn’t have to run for office and feels more freedom to act, they are turning the only knob they control in the machine and it is likely NOT the knob we need tuned. Or, more charitably, it may help them chase some of the froth out of the economy but it will be insufficient to re-capitalize key segments of the economy to correct systemic imbalances and massive underspend for infrastructure.

Is the Fed the right actor for this situation?

Absolutely not. We haven’t haven’t sold the public on a shared, CORRECT view of “the problem” we face. Judging from 2022 election cycle ads already running, the public is being “sold” that our problem is due to stifling domestic energy policies choking supply of oil/gas and wasteful stimulus money in 2020 and 2021 that led to too many nominal dollars chasing the same sized pie. This is NOT the problem we face.

The problem we face is the result of different square wave changes in key elements of any economy – energy, labor supply and logistics – that have all been building for decades but became apparent within 2-3 years of each other. With energy, the writing has been on the wall for 20 years that fossil fuels need to be deprecated and IN FACT the fossil fuel industry has been doing exactly that for over 20-30 years. While new technology was developed for fracking which helped change the unrefined supply picture domestically, oil companies haven’t built a single refinery ANYWHERE in the US since the 1970s. Do they know something they haven’t been telling the rest of us as we buy gas for $5.50+/gallon? As a matter of fact they do… Yet the US is doing nothing to organize our attack on shifting away from fossil fuels, both at the legacy source layer, the re-engineering of infrastructure within the electric grid, accelerated investments in materials science to improve battery technology and geopolitical planning related to the next must-have rare-earth raw materials for battery manufacturing.

We are facing labor supply issues due to a variety of factors. Obviously, the pandemic contributed to the death of over one million people in the US and roughly 213,436 of those were of working age between 45-65 and 42,247 were under age 45.…

Those deaths were presumably spread across job categories / skill levels so the pandemic literally destroyed a vast amount of human capital that cannot just be instantly replaced AT ANY PRICE by dangling higher wage rates in front of the remaining work force. If a job requires significant training (doctors, nurses, skilled trades, etc.), that supply cannot be instantly recreated. And the 213,436 + 42,247 weren’t the only workers taken out of the labor pool, those were just the ones that died. Many more face long-term health issues that prevent them working in their original capacity, again magnifying skills shortages. The Federal Reserve has no knob whatsoever that can cure skills shortages in labor markets, even over multi-year cycles. They are simply not on that side of the proverbial machine. Raising interest rates to slow an “overheated economy” because of spiking labor rates in these niches does NOTHING to solve the shortage.

Finally, the economy is being crippled by logistical issues stemming from the shortsightedness of Corporate America. A story from the last couple of days pointed out that currently, the US has ZERO capacity to make semiconductors using the latest 5 nanometer technology in use to create state of the art chips for CPUs, ECUs in cars, smartphones and more esoteric products like control systems, weapons systems, etc. ZERO. The same off-shoring strategy for semiconductors was followed in many other sectors, leaving the manufacturing of many products in a state where while America may still provide 50-75% of the value add, the ENTIRE product cannot be sourced and completed domestically, putting the complete manufacturing of many products at risk due to physical or political disruptions. The Federal Reserve has no knobs under its control that can alter incentives facing domestic companies to rethink on-shore/off-shore strategies or influence taxing and subsidy policies by federal or state government to encourage on-shoring of key capabilities.

As philosopher king, what would you be doing?

While attempting to obey a no-politics edict, solving these problems requires work in the following areas:

Create a shared definition of the key problems – Failure to do so will allow special interests to continue leveraging our already crippled, gerrymandered, un-democratic system to thwart any meaningful change that improves life in aggregate at the expense of a small minority.

Immediately create subsidies to create geographically diverse chip fabrication plants in the US – These should not all be located in a single region (like California subject to earthquakes, Texas subject to grid failure, Florida subject to hurricanes, etc.). The idea of designing and creating $60,000 cars which cannot be completed due to the inability to make a $1500 ECU is idiotic. Note that American firms know HOW to make these chips and the plants that make them, those firms allowed competitors to get better at it and customers followed the margins to swing purchases to the biggest, least expensive providers (like TMSC). These plants don’t employ tens of thousands of workers so at the same time construction is initiated, government and industry need to create an plan to incent education supporting plant worker skills and higher level skills in material science, etc. that support these types of plants.

Modernize and simplify the tax code so everyone in the boat feels like everyone else has a hand on an oar and is rowing along with everyone else. – In an environment combining high inflation, growing corporate profits and (net) stagnation in wages (adjusted after the skyrocketing inflation), that can only mean that wealth is continuing to funnel to the top where it is least needed. There are roughly 1,000 billionaires in the United States. Lowering marginal tax rates, lowering rates on capital gains, jiggering depreciation rates on equipment, etc. only has so much aggregate impact to the economy if focused on what benefits 1000 people. The inertia of a $23 trillion dollar economy with 350 million participants cannot be changed unless MILLIONS of people see a material change in incentives.

Modernize education to produce greater literacy in science, personal economics and government / law. – I fear that many of our economic problems stem from special interests adopting techniques from Madison Avenue and applying them to far more critical decisions regarding issues related to science and pubic policy. We’ve succeeded at promoting two or three really strong “brands” of thinking but while everyone seems 100% sold on their brand, they cannot describe what the brand means or accurately link ideas linked to that brand to the daily processes affecting their life. But they KNOW they want their state auditor to be pro-life… Or pro-choice… But never contemplate the fact that the job of an AUDITOR should not involve those issues. You should be looking for someone with an advanced degree in finance with a legal background and experience managing teams and technology.




Great Post, and nails the problem!

If to solve our economic problems it would be good enough if not even half of the people were not even half way understanding of not even half of your list we would still be totally screwed!.


david fb
(drank in politics in his mother’s milk, his mother being a brilliant politician)

Modernize education to produce greater literacy in science, personal economics and government

I just received a mailer from a major financial institution (whose name rhymes with J.P. Gorgon Thrace) promoting getting a “special” debit card for kids. This would allow parents to start young in their education of their kids about how to save and spend money.

First of all, the majority of Americans don’t know how to handle their own finances when using credit/debit cards. Second of all, if it’s training kids about how to save, then just issue them bank passbooks and have them deposit their allowance each week - watching their balance grow as nearly non-existent interest is added each month.



a “special” debit card for kids. This would allow parents to start young in their education of their kids about how to save and spend money.

My 16yr old son actually has one of those cards and it works great. You can assign money that can be spent anywhere or just on certain things I specify.

I can also assign him jobs/chores with amounts assigned so that when he completes them, he can get paid. I can also set up an allowance. Since he is driving now, he needs gas money and it is a great feature to put in “mow the lawn” and tie a payment to it.

For a free service, it is really pretty slick.

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Thanks for the excellent reply.