Former Fed official: investors may be confused by economic data

In an interview with Goldman Sachs' monthly research magazine, Top of Mind, former Dallas Fed President Kaplan said, “Many market and economic observers have gone data-crazy, and there's an infinite amount of data available to fulfill that focus. But I call data 'bouncy balls' because the few data releases in any given week usually send confusing economic signals, which can also be all trees and no forest.”

In Kaplan's view, in order to gauge the overall direction of the economy and policy, investors should perhaps pay more attention to underlying structural drivers, including demographic trends, technology-driven disruption, regulatory policy, and the impact of the energy transition. He resigned in 2021 after his personal dealings sparked controversy.

Of course, Kaplan is also keeping an eye on the data, including the upcoming August jobs report on Friday. He said a “relatively solid” number would prompt the Fed to cut rates by 25 basis points, but if that and other data are weaker than expected, the Fed could also cut rates by 50 basis points.

Kaplan said the Fed could fall behind the curve, but only for one or two meetings. He does think it's time for the Fed to start cutting rates.

I would say that while consumer spending is weakening, it's in good shape because even low-income workers continue to be employed,” he said. The risk is that unemployment does rise sharply, which would hit an already vulnerable population particularly hard. That's why, from a risk management perspective, the Fed would be wise to reduce its leverage and lower the federal funds rate while remaining vigilant in its fight against inflation.”