MacroScope

Fed policy, University of San Diego style

April 4, 2012

A Fed economist for nearly two decades, San Francisco Fed President John Williams also taught for half a year at Stanford’s Business School in 2008, but on Tuesday, his students appeared to be only half listening.

When Williams took the podium a warm, sunny day at the University of San Diego’s School of Business Administration, he argued that the U.S. central bank must press on with its easy money policy to boost the economy. The recovery is growing too slowly to trim unemployment very quickly, he told the audience of perhaps 200 students and professors, and inflation is set to fall below the Fed’s 2 percent target. The Fed, he emphasized, is nowhere close to raising rates.

After taking a few questions from students,Williams left to chat with reporters and then to head to the airport for his flight back home. Then, with the help of economists from the San Francisco Fed, students held a mock Fed policy-setting panel.

At the end of an hour’s discussion, by a 5-2 vote, they kept the Fed’s zero interest-rate policy in place – just as the Fed, by a vote of 9 to 1, had done in March. But the statement the students released – modeled on the one the Fed publishes after its regular policy-setting meeting – heavily underscored the possibility the Fed could tighten earlier than 2014. The two dissenters had argued for a more hawkish statement.

“The Fed reserves the right to alter from that path at a future date as conditions warrant,” the University of San Diego student statement said. “The duration commitment will not be extended past 2014.”

The statement was perhaps to be expected, given the hawkish bent of the policymakers the students chose to represent. Fed Chairman Ben Bernanke, governors Daniel Tarullo and Sarah Bloom Raskin, and regional Fed president William Dudley (New York) all voted in favor, as did, surprisingly, Kansas City’s Esther George. Charles Plosser (Philadelphia) and Richard Fisher (Dallas) both dissented.

Williams, whose policy views put him on the dovish end of the spectrum at the U.S. central bank, was not represented on the student panel; nor were Vice Chairman Janet Yellen, Cleveland Fed President Sandra Pianalto or other like-minded doves. Richmond Fed President Jeffrey Lacker, the lone dissenter in March’s real Fed decision, was also not represented.

The key question, however, remained unanswered: Will rates go up before graduation?

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