Paul Kasriel spends his days learning the bass guitar for a band he joined after he retired last year as Northern Trust’s chief economist. Between practices, however, he works on an economic yardstick that many on Wall Street would find fascinating.
It is a calculation that helps him assess whether the Federal Reserve’s extraordinary stimulus will lead to economic growth. That endlessly debated subject came to the fore again on Friday, when the Labor Department said the economy added 175,000 jobs in May. That’s a solid showing, but maybe not strong enough to convince people that the Fed will taper its enormous asset purchases sooner rather than later.
But from his vantage point in Sturgeon Bay, Wis., Mr. Kasriel says he believes the economy will start growing at a rate that should prompt the Fed to cut back its efforts. “I think the Fed should taper in the second half of the year,†he said.
At Northern Trust, Mr. Kasriel gained a following for his pithy analyses that were often prescient. Not many economists predicted a slowdown in growth before the 2008 financial crisis. But Mr. Kasriel was sounding warnings throughout 2007, and as the year was coming to a close he rolled out the Kasriel Recession Warning Indicator, which showed a 65.5 percent chance of a recession the following year.
After the crisis, in 2010, he predicted the second big round of Fed stimulus would lift the economy, and it did. Then, in 2011, when the Fed ended that effort, Mr. Kasriel predicted that the economy would suffer, and growth did weaken in 2012.
In his analyses, Mr. Kasriel pays particularly close attention to credit.
Banks effectively get to create money out of thin air as they lend to companies and individuals, and as this money gets spent, the economy benefits. This activity was severely undermined after the crisis, which is why, he thinks, the Fed had to step in and us its balance sheet to pump money into the economy. If banks aren’t creating new money, the Fed has to help. Forcefully, it has to outright increase the quantity of money and credit. Hence the term quantitative easing, or Q.E., which is bandied about on Wall Street.
Mr. Kasriel’s special yardstick adds together both bank credit and assets held by the Fed. When that total is going up by, say, more than 5 percent, the economy gains strength.
“Follow the money,†said Mr. Kasriel, who posts intermittently to his blog, The Econtrarian.
In 2011, Fed assets and bank credit grew by a combined 6.1 percent, and the economy was expanding by over 4 percent in the fourth quarter of the year. In 2012, that total went up by 4.4 percent. In the final quarter of the year, the economy was barely growing, though it of course faced major headwinds.
Despite the uncertainty swirling in the markets today, Mr. Kasriel is getting excited about the economy. The Fed’s most recent stimulus effort is causing his favored yardstick to grow again. Bank credit was up 4 percent in the first quarter and the Fed’s assets jumped 12 percent. Overall, that caused Mr. Kasriel’s metric to rise 6 percent in the first quarter.
“That will translate into an acceleration of private domestic spending,†he said.
Mr. Kasriel was a keen critic of the Fed before the financial crisis, and he still harbors a deep skepticism toward the central bank. He suspects it will over-stimulate the economy for too long.
“From its public statements, I am not sure the Fed understands Q.E.†he said.
