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The Fed's Dilemma: This Time IS Different!

David R. Kotok
Thu Sep 14, 2023

Here’s an argument about why this time (2023–24) under Fed Chair Powell is different from the 1970s inflation fight under Fed Chairs Burns and, subsequently, Volcker. We are ignoring the brief Fed Chair Miller interregnum (March 1978 to August 1979). We especially want to thank Mike Konczal for his clarity and assistance.
Mike Konczal, is a director at the Roosevelt Institute and co-author, with Joseph Stiglitz, of Rewriting the Rules of the American Economy. He originated the following marvelous chart depicting two different cycles in which the inflation rate accelerated higher, and the Fed started a tightening cycle. At Cumberland, we have been comparing these two cycles for clues about what lies ahead in 2024. Clearly, the unemployment rate indicator is currently a flawed signal in the present cycle if you are basing your decisions on it.


Cumberland was a newly formed independent, fee-for-service investment advisory firm in 1973. At the time, the unemployment rate was at the top of the list of strong indicators with efficacy in helping to forecast a financial market trajectory and a Fed policy path and a recession. Those were the days of Fed Chairman Arthur Burns, with a brief interregnum by G. William Miller, and finally the iconic Fed Chairman Paul Volcker, who fought a US inflation that was rising into double digits and did so knowing that he would cause very high unemployment when he took US interest rates to the highest levels that had existed since Abraham Lincoln and the Civil War. As Maurice Chevalier cavalierly sang in the famous musical Gigi, “Ah yes, I remember it well.”

So why is the chart depiction by Mike Konczal so important?

Here’s why, using three additional charts from FRED.


Sources: FRED and Wikipedia (“Employment-to-population ratio”)


Sources: FRED and Wikipedia (“Employment-to-population ratio”)


Source: FRED

My takeaway is that things are hugely changed from the 1970s. Thus, the pressure on labor costs is now upwardly sloping and the higher labor income is only slowly drawing workers into the labor force. Meanwhile, a flat population growth rate and a declining life expectancy in the United States exacerbate the problem. Our restrictive and discouraging immigration policy also makes matters worse. Try and tell that to some of the members of Congress we elect.

There are solutions.

1. Have a lot more babies. That one is not very likely. And, even if we did, it takes awhile for a baby to grow old enough to enter the labor force.

2. Open the doors to a few million younger working-age immigrants who want to work and settle in the United States. We need them and can use them, as the charts above confirm. And imagine how quickly the projections of the federal budget deficit and the funding of trust funds like Social Security will change when millions of new and younger workers are contributing to those trusts with the taxation of their earnings.

So, we thank Mike Konczal for the chart. He has replaced a thousand words with his depiction of these two very different cycles.

The rest of the cure is up to us and the Members of Congress we elect and the governance we get from them. I’m not sanguine about that.

But 2024 is certainly shaping up into a fascinating political year. Meanwhile, the Fed’s inflation-fighting job certainly does not appear to be over.

We have a cash reserve in the US Equity ETF portfolio.

David R. Kotok
Co-Founder & Chief Investment Officer
Email | Bio



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