Inside USD

Dollars and Sense: San Francisco Federal Reserve Bank Holds Symposium at USD

Tuesday, April 10, 2012

Are low interest rates in danger of fueling inflation? Is the money supply expanding fast enough to keep the economy going?

Questions about interest  rates and monetary policy have taken on even greater urgency since the 2008 financial crisis and deep recession. Last week, students at USD had the opportunity to hear from San Francisco Federal Reserve Bank President John Williams (pictured homepage) and simulate the roles of policymakers voting on these issues.

More than 200 USD economics students packed USD’s Warren Auditorium to hear from Williams who began by recalling how USD economics professor Steven Sumner worked for him in the mid-1990s at the Federal Reserve Board in Washington, D.C. “Steve’s boundless enthusiasm, hard work and excellent programming skills were just what I needed as I embarked on my career as a research economist,” Williams said.

Accompanied by members of the national financial press from Reuters, Bloomberg News and the Wall Street Journal, Williams noted how “central banks and governments around the world stepped in to provide emergency loans and other support,” helping to prevent complete financial collapse.

Over the last three years, “improvements in credit, and rises in consumer confidence have helped the economy gain real traction,” he said. “Consumer spending hasn’t been growing fast but it’s been growing steadily. Car sales have surged and nearly reached pre-recession levels in January. The rebound in car sales and strong exports of other goods have helped U.S. manufacturers create jobs at the fastest pace since the mid-1990s.”

But the recovery remains tepid in many areas and unemployment is likely to still be around 7 percent at the end of 2014, he noted.  So the Fed has continued to look for ways to stimulate the economy, including buying large quantities of of longer-term securities issued by the U.S. government and mortgage agencies, putting downward pressure on other longer-term interest rates and making it cheaper for households, businesses and governments to borrow. “Eventually, as the recovery picks up, we will trim our securities holdings and raise our interest rate target,” Williams explained.

The question is when, and that’s where students in Sumner’s Money and Banking class came into the picture. Acting as members of the Federal Open Market Committee, students also heard from several Fed economists and took on policymaker roles including that of Federal Reserve Chairman Ben Bernanke. Representing Bernanke, USD junior and economics major Luke Stager presented a statement that with “little evidence of inflationary pressures,” the committee has the “opportunity to target real economic growth, in keeping with the Fed’s mandate to maintain price stability and economic growth.”

On a 5-2 vote, the committee agreed with the proposal to target the federal funds rate — the rate at which depository institutions lend reserve balances to each other overnight — in the range of 0 – 0.25 percent and “maintain, as conditions dictate, our current duration commitment through the end of 2014.”  There were a few notes of dissent. Representing Richard Fischer, known as the ”inflation hawk” of the committee, USD sophomore and business economics and Spanish major Mark Barnett (pictured above left) voted against the statement to express opposition to the Fed’s “unconventional monetary policies as they can be unpredictable and have unforseen consequences, such as long-term high inflation.”

Having the opportunity to participate in the symposium and meet with Williams and other Fed officials was “phenomenal,” Stager said. “These people are the elite, the A-team and being able to interact with them was an experience that will not soon be forgotten.”

Anna Randall, a junior majoring in political science with a minor in economics, represented Sarah Bloom Raskin, a governor on the board of the open market committee. “I feel like I learned an entire semester of economics in the last two months,” she said. “I also learned how to present a formal presentation and how to speak in front of people which was great.”

Amanda Polacek, a junior majoring in business economics with a finance minor, found chatting with Williams at lunch very informative. “He emphasized the importance of the idea of consensus within the FOMC meetings, which is a very foreign concept to many fiscal policy discussions. Many of the members come from an array of very diverse professions and academic backgrounds, yet consensus is what they really strive to achieve.”

Fed economist Yelena Takhtamanova told students that the San Francisco Bank does about a half a dozen of these events each year and that they’ve taken on greater importance because of the unprecedented steps the Fed has taken in the last few years. “Much of this is not in the textbooks yet,” she said so it’s important for Fed officials to get the word out about “what’s been going on.”

–  Liz Harman

Photos by Chris Keeney

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