E Is USA Low Capacity Utilization Low Enough To Prevent Recession?

Dr. Lambert remains skeptical of Neel Kashkari's call to keep interest rates low. He thinks they can be raised some, without hurting wages in a high profit environment:

As far as Kashkari, I think you had a notion at the end of your post that maybe he was searching for reasons to not raise rates now. And using fairness of workers as an excuse. Yet the data does not really suit his story, so I don't think economists will follow the story.

Ultimately, though, raising rates too fast or too far can push the nation into recession and I think some Fed insiders do fear any improvement in wages even though Dr. Lambert would say we desperately need improvement in labor share of GDP! 

We can come away from this interaction with leading economists with the understanding that the decisions of the Federal Reserve Bank do matter. How they use their tools to control the economy still matter, and still can make or break economic growth, but so can the business community. At this point, that community could ultimately be more important than the Fed in determining economic prosperity for the nation.

As for Dr. Lambert's view, it is certain that he consistently views labor as being weak, and that labor growth is weak, as is its share of GDP. His formula, while not being easy for all of us to understand, is perfectly clear:

Economy is currently at limit of unemployment where either labor share rises, capacity utilization drops or unemployment starts rising.

If  firms do not increase hiring and pay and/or decrease profits and actively lower prices, and capacity utilization does not drop, we could be facing unemployment/recession. It isn't so much what the Fed does with regard to rates. It is what business does with regard to greed that will matter. 

See also:

For All You Inflation Fearmongers, Dr Lambert Has An Answer

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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Moon Kil Woong 3 years ago Contributor's comment

One can't blame businesses for their actions. The Federal Reserve's low rates and QE have encouraged companies to not invest in capital equipment or save but rather run up debt and pay dividends and buy back stock shares. Companies have grown by buying up competitors and eating small businesses rather than trying to grow organically in a zombie economy. This is why the S&P is up even though the economy isn't growing significantly. Like a zombie, we are eating each other rather than growing the economy.

It is not greed driving the market, but rather a poorly managed economy that is separating from economic fundamentals as we speak thanks to the Federal Reserve's obsession with a socialist, managed economy tools.

Gary Anderson 3 years ago Author's comment

Well, Moon, it isn't classic socialism as business is still private. I suppose we could call it socialism. But there is only so much the Fed can do. I remember that Business Insider's Henry Blodget had the answer, that companies should simply pay better wages. We would not need Fed helicopter money to even out the economy, just a fair wage. Henry pointed out that there needs to be some Henry Ford's out there. The Fed cannot force companies to pay a wage that would ultimately make them more money with more monetary turnover. Money trickles back up, so the Fed and business are both chicken. Put money into the hands of the people. It is a no brainer. Want fewer customers, then automate everything. You will win for awhile, but not for the long term.

Moon Kil Woong 3 years ago Contributor's comment

QE is a command economy tool as is extreme manipulation of interest rates not used for countering downturns. Of course, business is still private. It is business that suffers from the loss of free market signalling when the Federal Engages in such tools.

Gary Anderson 3 years ago Author's comment

Yes, QE has certainly failed to bring many back into the work force. It wasn't that good for main street as we look back on it. Powell admitted there is slack in the labor force. That is a pretty big admission considering you seemed to hear only that the labor market was tightening, from the current Fed chairman and her minions.