Daily Fintech Conversations

Will we see FintechUp join FedUp in ushering the Fed into the modern era?

The always excellent Financial Revolutionist asks this question. In their words:

“One factor may be that the Fed’s data sources don’t capture the rapid shifts taking place in the economy. Consider these facts: 1) Since 2008, U.S. student debt has risen by over 50%; 2) Uber, Airbnb and WeWork — each possessing asset-light, freelance-driven business models that millennials love — were all founded; and 3) one company (Amazon) has come to utterly dominate America’s Retail industry. Our hope is that as the Fed looks to build its new framework for understanding economic growth prospects and inflation pressures (or lack thereof), its analysts look to fintech leaders on the front lines of incorporating innovation into various kinds of economic transactions. Who knows, maybe next year a group of entrepreneurs can form a group called FintechUp and join FedUp in ushering the Fed into the modern era.”

It is a great question because the model of how the economy works (which drives Fed decisions which drives the global economy) is based on a historically brief era that we might call the golden age of industrialization.

Anecdotally we all know that the gig economy is real and therefore that official stats may miss a lot of economic activity. Just recently JP Morgan added some hard data to this anecdotal observation, specifically how seniors are working in the gig economy.

What do you think? Is the Fed working to some old models that need some Fintech help?

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The Fed has all Data it needs and then some! It even has and had all the information in plain sight prior the financial crisis and Mr. Greenspan in a minute of enlightenment communicated the coming problem. The quick answer (Opinion) is NO; if the objective is change. It has the same problem as the SEC. A revolving door. Furthermore, its members are the banks. Its not independent as the Bundesbank. The initial proposal (German) for the Fed was not approved due to the requested independence.

Fed decisions Do Not drive the global economy. Business cycles do. The Fed may extend or shorten the cycles as can economic policies or lack thereof. With result we all have in memory. Bush policy = Coolidge Jr.

Great post Bernard! The gig economy and overall digitalization of the economy is definitely being under reported by agencies, including the Fed. The iPhone for example has improved tremendously since the first iteration, and the price is the same. This has doubtless improved productivity, and so “created value”, but since no tangible good is produced and no transaction happens, its not counted anywhere. Effectively, technological progress is deflationary, just like offshoring production to China was in the last decade.

If we get mostly digital transactions, (say 90% of all transactions by value), it should be possible for agencies to have a real time or near instantaneous snapshot of the economy as opposed to gathering data and doing it slowly over days/weeks.

Specifically for the Fed, there are a lot of political factors along with economic in making decisions, and the make up of the board is largely academic. So convincing them to use this might take quite a while. The potential exists, but doubtful there is political will or serious interest in modernization.

@andrefassler good point, Fed is not primary driver of Economy - maybe of stock market

@Prathamesh yes, i think the critics of monetary easing miss how deflationary tech is and - with software eating the world - this matters

Bernard, thanks for highlighting the piece I wrote on the Fed. Prathamesh, I agree with your perspective. Every time I meet with someone who has either worked at the Fed or knows a lot about the Fed, I ask the same question: Does the Fed understand the degree to which tech is changing our economy? The answer is usually the same: Yes. My next question is this: Is the Fed changing its apporach to measuring the economy based on these changes? I have never gotten a straight, convincing answer to that question.
Best, Gregg