Former Federal Reserve Official: Investors may be misled by economic data
Former Dallas Fed President Kaplan stated that investors may be misled by economic data and should focus on fundamental structural drivers. Recently, the poor August ISM manufacturing data in the United States led to a stock market crash. He believes that the time has come for the Fed to cut interest rates, but risk management should be taken into account, as rising unemployment rates could severely impact low-income groups
On Tuesday this week, the disappointing August ISM manufacturing data in the United States led to a sharp drop in US stocks at the beginning of September, further triggering declines in the Asia-Pacific stock markets and European stocks.
Former Dallas Fed President Kaplan, in an interview with Goldman Sachs' research monthly "Top of Mind," said, "Many market and economic observers have been crazily focused on data, with an unlimited amount of data available to meet this focus. But I call data a 'bouncing ball' because a few data releases in any given week typically emit confusing economic signals, which may also be a case of not seeing the forest for the trees."
In Kaplan's view, to measure the overall direction of the economy and policy, investors may need to pay more attention to fundamental structural driving factors, including demographic trends, technology-driven disruptions, regulatory policies, the impact of energy transition, etc. He resigned in 2021 after controversy over personal trading.
Of course, Kaplan is also watching the data, including the August employment report set to be released on Friday. He said that a "relatively robust" data would prompt the Fed to cut rates by 25 basis points, but if this data and other data are weaker than expected, the Fed could also cut rates by 50 basis points.
Kaplan stated that the Fed may lag behind the curve, but only for one or two meetings. He does believe that the Fed should start cutting rates.
He said, "What I would say is that while consumer spending is softening, it is in good shape because even low-income workers are continuing to be employed. The risk is that the unemployment rate does rise significantly, which would be particularly hard on an already vulnerable population. That's why from a risk management perspective, it is prudent for the Fed to reduce chips, lower the federal funds rate, and remain vigilant in the fight against inflation."