Introducing

Paul L. Kasriel

Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian.   After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department.   Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002).   Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele).   Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.

Publications by Paul L. Kasriel

• USA| Sep 14 2026

  Chairman Warsh and M2 – He Almost Gets It

  At the recent Jackson Hole annual Kansas City barbecue, Fed Chairman Warsh mentioned that if the Fed had paid more attention to the surge in the M2 money supply in 2021, it might have raised the federal funds rate sooner, which, in turn, might have moderated the sharp increase in consumer price inflation that ensued. Wow! The ghost of Milton Friedman, may his memory be a blessing, must have been talking to Warsh while he was at Stanford’s Hoover Institution. The Fed could do worse than paying more attention to the behavior of the M2 money supply. It could do better, though, by paying more attention to behavior of the sum of the monetary base (reserves of depository institutions held at the Fed plus currency) plus securities and loans on the books of depository institutions (broad thin-air credit). But where Fed Chairman does not quite get it is his continued emphasis on using the federal funds interest rate as the Fed’s operating instrument. If the ghosts of Milton Friedman and Robert Laurent (also, may his memory be a blessing) would have had more séance time with Warsh, they might have been able to convince him to abandon using the federal funds interest rate as the Fed’s policy instrument and instead directly set the level of depository institution reserves such that a constant rate of growth in a monetary quantity, be it M2 or thin-air credit, could be achieved. This would require some institutional changes such as the elimination of interest payments on reserves and the re-introduction of reserve requirements. (See, my August 25, 2026 commentary “A Modest Monetary Policy Proposal for Fed Chairman Warsh to Consider” for a discussion of these necessary institutional changes.)

  Let’s compare the relationship between percentage changes in the M2 money supply and thin-air credit with goods/services price inflation. Plotted in Chart 1 are the percent changes in the annual averages of the M2 money supply (the blue bars) vs. the percent changes in the annual averages of the Gross Domestic Purchases chain-price index (the red line) starting in 1960. The highest positive correlation between the two series occurs when percent changes in M2 are advanced (lead) by two years. The correlation coefficient is 0.48. Although a correlation coefficient of 0.48 is a long way from the maximum possible value of 1.00, it’s not bad for government work.

  by:Paul L. Kasriel

  |in:Viewpoints
• USA| Aug 25 2026

  A Modest Monetary Policy Proposal for Fed Chairman Warsh to Consider

  Starting on August 27, 2026, and running through August 29, 2026, the Federal Reserve Bank of Kansas City will host its annual “barbecue” in Jackson Hole, Wyoming. The best and the brightest of monetary policy gurus from around the world will be there and the highlight of every conference is the comments by the chairman of the Federal Reserve Board. (For some reason, my invitation has repeatedly been lost in the mail.) The theme of the 2026 conference is “Financial Innovation: Implications for Payments Policy”. Although this is an important topic, is it really the most pressing issue for the Federal Reserve to be considering? Of course, I am biased, but I believe that Fed should be discussing a superior way to conduct its monetary policy so as to more consistently achieve an inflation target, especially in an environment of random shocks to the aggregate supply of real goods and services. For whatever reason, these random shocks seem to have been occurring more frequently in recent years. So, I humbly suggest that Fed Chairman include in his remarks that the Federal Reserve operate in a manner such that the sum of depository institution reserves and the securities and loans on the books of depository institutions grow at some constant rate. (Depository institutions are commercial banks, saving institutions and credit unions. Commercial banks dominate depository institutions.) In what follows, I will provide empirical evidence demonstrating that growth in the nominal annual averages of this sum, let us call it “thin-air” credit, has a relatively high correlation with future growth in the nominal annual averages of domestic aggregate demand and the future rate of inflation associated with domestic aggregate demand. In addition to having relatively high correlations with growth in nominal domestic aggregate demand and the associated inflation rate, a constant rate of growth in “thin-air” credit will prevent cumulative increases or decreases in the rate of inflation. I will provide the rationale for why I believe 5-1/2 percent would be a reasonable target rate of growth in thin-air credit. I also will explain how the Federal Reserve can achieve, with precision, whatever target rate of thin-air credit growth it chooses without operating via a federal funds rate target. Not only would this modest proposal eliminate persistent overshoots and undershoots of the Fed’s inflation target, it would simplify the Fed’s communication challenges. In terms of forward guidance, all the Fed chairman would need to say at the end of every Federal Open Market Committee (FOMC) meeting is that the committee intends to have the sum of depository institution reserves plus securities and loans grow at a steady annual rate of 5-1/2 percent.

  Plotted in Chart 1 are the year-over-year percent changes in the annual averages of the sum of depository institution reserves at the Federal Reserve, securities and loans (the blue bars) and the year-over-year percent changes in the annual averages of nominal Gross Domestic Purchases (the red line). (Monetary policy primarily influences domestic aggregate demand. That is why I have chosen nominal Gross Domestic Purchases as the “dependent” variable rather than Gross Domestic Product, because the latter involves exports, which is more of a function of foreign demand for US goods and services.) The gray shaded areas represent periods of recession. The highest correlation between these two series starting with 1955 data occurs when thin-air credit is advanced by one year. That correlation is 0.52 (shown in the upper left corner of the chart). This implies that growth in thin-air credit leads growth in nominal Gross Domestic Purchases by one year. So, what happens to thin-air credit this year has its largest effect on nominal Gross Domestic Purchases next year.

  by:Paul L. Kasriel

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• USA| Aug 09 2026

  Higher Income Households Spend More than Lower Income Ones – So, What’s New?

  There continues to be talk about how high-income households are carrying the economy. Is this new? The Bureau of Labor Statistics (BLS) annually surveys households regarding their expenditures in the aptly-named Consumer Expenditure Survey (CES). The latest BLS Consumer Expenditure Survey is for 2024. So, we do not know what went on in 2025 and so far in 2026. But what we do know from the 2024 CES is that higher-income households continue to spend more than lower income households – duh. But what we also know is that in 2024, things were close to or at their 1984-2024 medians with respect to average annual nominal expenditures compared to aggregate expenditures. To wit, in 2024, average annual nominal expenditures for the bottom 20% income quintile for households compared to the total average expenditures of all income quintiles was 8.9% versus a median of 8.8%. The comparable figure for the top 20% income quintile for households was 38.3% versus its 38.3% median. These data as shown in the chart below.

  by:Paul L. Kasriel

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• USA| Aug 07 2026

  The July 2026 Employment Situation – One of These Things Is Not Like the Other

  The Bureau of Labor Statistics (BLS) reported on August 7, 2026 that the three-month moving average of the change in total nonfarm payrolls was only 20,000 in the three months ended July 2026. This compares unfavorably with the 142,000 average change in the three months ended May 2026. (See Chart 1). If we can believe the BLS data released on August 7, three months of which were revised, the US labor market has weakened significantly in the past three months.

  by:Paul L. Kasriel

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• Global| Aug 03 2026

  The Market CanNOT Tighten for the Fed

  At his news conference on July 29, 2026, Fed Chairman Warsh stated that even though the FOMC had not made any policy changes since he was piped aboard the Board, market interest rates had risen, which he interpreted as “the market” tightening monetary policy. I will argue in this commentary that the market cannot tighten for the Fed or the FOMC. Rather, perhaps counterintuitively, I will argue that an increase in market interest rates in the absence of an increase in the federal funds rate represents an easing in monetary policy.

  Plotted in Chart 1 are the daily observations of the yields on the Treasury 10-year, 2-year notes along with the effective federal funds rate from May 2026 through the most current. Warsh was sworn in as Federal Board chairman on May 22, 2026. From May 22 through July 31, the yield on the 10-year Treasury note increased a net 11 basis points. The yield on the Treasury 2- year note increased a net 15 basis points. And the effective federal funds rate increased a net 1 basis point from May 22 through July 30. So, versus the federal funds rate, the yield curve steepened.

  by:Paul L. Kasriel

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• USA| Jul 05 2026

  Want to Reduce the Size of the Fed’s Balance Sheet? Eliminate Interest Paid on Reserves

  The Federal Reserve instituted the payment of interest on reserves on October 15, 2008, during the Great Financial Crisis. The motivating factor for this was that the federal funds rate was trading below the FOMC’s target rate. Banks had greatly increased their borrowing from the Federal Reserve. This created excess reserves (reserves in excess of then required reserves) in the banking system. These zero-yielding excess reserves put downward pressure on the federal funds rate. In order to induce banks to hold excess reserves and, thus, prevent the federal funds rate from falling below the FOMC’s target-rate level, the Federal Reserve began paying interest on reserves. By December 17, 2008, the FOMC had reduced the lower-limit of its target federal funds to zero. So, the Federal Reserve could have ceased paying interest on reserves because the FOMC’s target-level of federal funds rate was at zero, a level at which the actual federal funds rate could not fall below. Yet, the Federal Reserve persisted in paying interest of reserves.

  The FOMC began raising its FOMC target-level of the federal funds rate above effective zero in December 2015. Yet the Federal Reserve persisted in paying interest on reserves, which it does today with a FOMC target level of the federal funds rate at 3.625%. In February 2009, the FOMC engaged in the first of a series of Quantitative Easing (QE) operations whereby the Federal Reserve added large quantities of securities to its outright holdings, culminating in the largest QE operation in 2020 during the Covid pandemic. On April 1, 2020, the Federal Reserve eliminated reserve requirements on banks. With the massive amounts of reserves created by the Federal Reserve since 2009 and with the elimination of reserve requirements in 2020, how is the FOMC able to maintain the federal funds rate above zero? It does so by the artificially-created demand for reserves resulting from the payment of interest on reserves by the Federal Reserve.

  If Chairman Warsh wishes to reduce the size of the Federal Reserve’s balance sheet, I suggest that the Federal Reserve cease paying interest on reserves. Banks’ demand for reserves would fall significantly (but not to zero). This would enable the Federal Reserve to offload large quantities of securities in order to drain off the “excess” and unwanted supply of reserves. If the FOMC insists on continuing to conduct monetary policy through the federal funds rate, it could announce that it would lend reserves via repurchase agreements at the federal funds target level plus X basis points or it would borrow reserves via reverse repurchase agreements at the federal funds rate minus X basis points.

  The Federal Reserve owns $6.4 trillion of securities outright of which $4.5 trillion are US Treasury securities. So, the Federal Reserve owns about 14-1/2% of total marketable Treasury debt outstanding. If the Federal Reserve is concerned about the market “digesting” $6.4 trillion of debt all at once, it could phase down the amount of reserves on which it would pay reserves over time. But one way or another, there is no reason why the Federal Reserve should continue to pay interest on bank reserves.

  by:Paul L. Kasriel

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• USA| Jun 01 2026

  Despite Surging Food and Energy Prices, Households’ Relative “Discretionary” Spending Hit a High in April 2026

  With food and energy prices surging in recent months, you might think that households would be cutting back on their real spending on “discretionary” goods and services, i.e., total goods and services excluding purchases of food, energy, clothing, housing and healthcare. After all, households would have to use more of their income to purchase higher-priced food and energy goods and services, leaving less income for the purchases of more discretionary goods and services. However, real discretionary (as I have defined it) household spending in April 2026 was 53.9% of total real spending, the highest percentage registered since the data started being reported, January 1959.

  Plotted in Chart 1 are the monthly observations of discretionary real personal consumption expenditures as a percent of total expenditures (the blue bars) along with monthly observations of the personal consumption chain price index for food and energy goods and services (the red line). Notice that in the last three months starting in February 2026, the food-energy price index started rising, as did relative real consumer spending on discretionary goods and services. Similarly, back in 2022, food and energy prices were rising after Russia’s unprovoked invasion of Ukraine and relative real consumer discretionary spending also rose for several months. What might explain this counterintuitive phenomenon?

  by:Paul L. Kasriel

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• USA| May 11 2026

  Kevin Hassett Is Right, For Once?

  Grinnin’ Kevin Hassett, a White House economic adviser, said on Fox Business on May 6, 2026: “Credit card spending is through the roof. They’re [households] spending more on gasoline, but they’re spending more on everything else, too.” Hassett went on to say that the spending surge was due to households having “so much more money in their pockets”. Well, if households are running up their credit card balances, yes, they temporarily have “more money in their pockets”. Although Hassett thinks that this is a good thing, I see it as a reason why the increase in energy prices will seep into the prices of non-energy goods and services.

  Let’s look at some data that are consistent with Hassett’s credit-card spending hypothesis. Plotted in the chart below are the observations of the eight-week annualized percent changes in commercial bank credit card and other revolving loans. In the eight weeks ended April 29, these loans grew at an annualized pace of 12.7%. So, this is consistent with Hassett’s happy hypothesis about households running up their credit card balances.

  by:Paul L. Kasriel

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• USA| May 06 2026

  Inflation – Debt Default by Another Name

  The Congressional Budget Office (CBO) projects large federal budget deficits, in absolute as well as relative terms, as far as the eye can see. This, by definition, means continued increases in the federal debt, again in both absolute and relative terms. The CBO forecasts that the levels of interest rates across the maturity spectrum over the next 10 years will be approximately where they are currently. My “forecast” is that the levels of interest rates, especially in the longer maturities will be higher than the CBO’s forecast. Be that as it may, the CBO projects that net interest on the federal debt will rise inexorably over the next 10 years. Given that Social Security, Medicare, Medicaid and defense expenditures are projected to dominate federal outlays excluding interest on the debt, there is little room for the federal government to slow the growth in federal spending without precipitating a walker-aided march on Washington, DC. By the way, it is projected by the Social Security Administration that its “trust” fund for old-age benefits will be exhausted by 2036. This means that all else the same, benefit payments to then current recipients will have to be cut. Do you really think “all else will be the same”? I think there will be a change in the law allowing the Treasury to borrow more to allow Social Security to maintain its “promised” benefits. Increasing taxes in a meaningful way appears to be politically unfeasible. Under these circumstances, I believe that the federal government, with “cooperation” from the Federal Reserve will attempt to inflate away its federal debt/debt-servicing challenges. It will do this by the Treasury purposely shortening the maturity structure of the federal debt and inducing the Federal Reserve, which dominates the level of short-maturity interest rates, to maintain the federal funds rate at a below-equilibrium level. This will result in a steepening in the yield curve, with the level of longer-maturity interest rates increasing relative to the federal funds rate as well in absolute terms. This will be accompanied by faster growth in the credit created by the Federal Reserve and the depository institution system, i.e., credit created, figuratively, out of thin-air (drink). In turn, this faster growth in “thin-air” credit will result in higher inflation.

  Plotted in Chart 1 are fiscal-year observations of federal budget deficits (-)/surpluses (+) in absolute terms (blue line) and relative to nominal GDP (red bars). Historical data run from FY 1965 through FY 2025 and CBO projections are from FY 2026 through FY 2036. By FY 2036, the CBO projects that the federal budget deficit will be $3.1 trillion, compared with $1.8 trillion in FY 2025. As a percent of GDP, CBO projects the budget deficit in FY 2036 to be -6.7% compared with a median of -3.0% for fiscal years 1965 through 2025.

  by:Paul L. Kasriel

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• USA| Mar 23 2026

  Data that Have Caught My Eye – Equities, CPI Inflation and Bank Credit

  Let’s look at some data related to US equities first. Plotted in Chart 1 are the end-of-year values of directly-held equities held by households at market value as a percent of households’ total assets at market value. At the end of 2025, this percentage was 22.95, a post-World War II record high.

  by:Paul L. Kasriel

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• USA| Mar 10 2026

  History Rhymes – The Siren Song of Core Inflation

  The concept of “core” inflation, that is, a measure of inflation excluding food and energy prices, came into fashion in 1973. In 1972, there was an El Nino weather phenomenon, which decimated the sardine school off the coast of Peru. Sardines were ground into fishmeal, which, in turn, was used as animal feed. The dearth of sardines resulted in an increase in the price of land-animal protein in 1973. Energy prices soared in late 1973 as a result of the OPEC oil embargo in the aftermath of the Yom Kippur War between Israel and its neighbors. (It has been argued that the catalyst for the OPEC oil embargo was the decline in the foreign-exchange value of the US dollar. OPEC nations were being paid in US dollars, which reduced their purchasing power for goods and services sold in other currencies). The chairman of the Federal Reserve at that time was the venerable Arthur Burns – he who must be obeyed. Burns argued that the increases in food and energy prices being experienced in 1973 were not the result of the current stance of monetary policy, but were caused by exogenous factors. Therefore, according to Burns, monetary policy decisions should be based on some concept of the underlying rate of inflation, not price increases resulting from exogenous factors.

  Let’s fast forward to today. Energy prices have shot up in the past week or so coinciding with the US and Israel shooting up Iran. Less reported, El Nino is once again plaguing Peru. I have not read that El Nino has adversely affected the sardines, but it is producing severe flooding in Peru, which is playing havoc with Peruvian agriculture. I bet you didn’t know that Peru is a major world exporter of blueberries, grapes, avocados, coffee and asparagus. Neither did I until I started writing this commentary. We do not know how long this military “excursion” into Iran will last and, therefore, how long the resulting increase in energy prices will last and/or how high they will go. But I suspect that we will hear Fed policymakers and financial media talking heads say that Fed policy should be guided by the current and expected behavior of core inflation. That is, the inflation rate excluding the prices of food and energy items because the current increases in food and energy items have not been caused by monetary policy and might be transitory. I’ll bet that at least one Fed policymaker whose term has been extended (and whose initials are SM) will argue that monetary policy should be eased because of the negative effects these food and energy price increases will have on real economic growth.

  Let’s look at what happened to core inflation in the early 1970s when food and energy prices flared higher (see Chart 1). In 1972:Q4, year-over-year core Personal Consumption Expenditures (PCE) inflation was 3.05%, food inflation 5.14% and energy inflation was 3.10%. By 1974:Q4, year-over-year core PCE inflation was 9.84%, food inflation was 14.10% and energy inflation was 25.80%. So, during this period, not only did food and energy price inflation soar, so, too, did core inflation.

  by:Paul L. Kasriel

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• USA| Dec 29 2025

  Festivus 2025 – I Got a Lot of Problems with the Treasury and the Fed

  With the passage of the One Big Beautiful Bill Act (OBBBA) of 2025, already high US federal budget deficits will rise even higher than projected by the Congressional Budget Office (CBO) at the beginning of the year. One element contributing to the rise in the deficits will be interest on the public debt. With the Treasury’s policy of shortening the maturity of the public debt and the politicization of the Fed, I fear that the US government will effectively default on its debt via inflation.

  Plotted in the chart below are fiscal year (FY) ratios of federal net interest payments on the public debt to federal net revenues (blue bars) along with end-of-quarter 3-month Treasury bill rates and 10-year Treasury yields. In FY 2025, the ratio of net interest on the public debt to federal net revenues was 5.4, the lowest in the post-WWII era and the lowest since FY 1991, when interest rates were almost twice the level they are now. You can think of the ratio of net interest to net revenues as similar to a corporation’s interest coverage. The CBO forecasts that with the passage of OBBBA, net interest will increase by $4.7 trillion starting in FY 2026 through FY 2029. Unless there is a Festivus miracle resulting in a commensurate increase in federal net revenues, the federal government’s interest coverage will fall below that of an already low FY 2025’s.

  by:Paul L. Kasriel

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