On March 5th, John Williams, President of the Federal Reserve Bank of San Francisco, visited Albers to speak in the Albers Executive Speaker Series. Since Williams serves on the Fed Open Market Committee (FOMC) and helps set US monetary policy, this was a special opportunity for our students and a true privilege for us to host him. It is the dream of every Money and Banking professor (and every former M&B professor like me!) to have a member of the FOMC on campus!
Nearly 300 students, faculty, staff, and friends gathered in Pigott Auditorium for his talk on, "The Federal Reserve: Inside Monetary Policy." In the talk, he wanted to address three questions: (1) What is so important about the Fed?; (2) What does the Fed actually do?; and (3) How does the Fed impact the economy?
On the first point, he noted that only the Fed sets monetary policy for the US, which is important for both the domestic and global economies. The Fed does this in a non-partisan way and thus far has been able to maintain its political independence. Williams also noted that the Fed has become much more transparent about monetary policy, which most observers see as a much welcome development.
While the Fed supervises banks and oversees the payments system, its most important function is to set monetary policy. The primary instrument for this is buying and selling securities through open market operations. We used to say Treasury securities, but since the Great Recession the Fed has shown it is willing and able to buy and sell other securities! Williams offered a frequently overlooked fact - the Fed has a great business model, as open market operations consistently generate a surplus of $80-90 billion a year!
To answer the final question on the Fed's impact, Williams provided financial market data on two episodes. The first was the June 19th , 2013 FOMC announcement that it would begin to think about "tapering" back its "Quantitative Easing," which was a surprise to the financial markets. The second was the Fed's September 18th, 2013 FOMC announcement that it would make no change to policy, when the financial markets expected some tapering. Williams presented graphs showing the movement of the S&P 500, 10 year Treasury rate, and dollar exchange rate at the times of those announcements. The graphs gave a vivid illustration that the Fed can make those variables move!
In the Q&A, Williams was asked how other central banks respond to our monetary policy. He noted that other central banks are most concerned with their policy goals, which can differ from the Fed's, and he noted that Fed was driven by domestic concerns. Although there are differences in central bank goals, policy makers frequently end up on the same page.
He was also asked how to avoid future financial crises. He noted that monetary policy is a blunt instrument and cannot be used to forestall a financial market crisis or pop a financial bubble. He also noted that the Great Recession was not a result of the housing bubble as much as it was the result of financial securities based on the housing market, and thus ultimately savaged when the housing bubble burst. He opined that we will never eliminate asset bubbles, but that stronger regulation and proactive regulatory moves can temper the excess.
When asked about how events in the Ukraine might impact the economy, he noted that at the moment the impact is mostly geo-political, not economic. However, he did note the possibility of a small country like the Ukraine having a contagion effect on the global economy.
As for his short term economic forecast, he expects the economy to continue to grow at 2.5 to 3% and for the unemployment rate to fall to 5.5% by the end of 2015.
Since he has worked closely with Fed Chairwoman Janet Yellen, he was asked what it was like to work with her. He responded that she has the respect of everyone at the Fed, and while she herself has strong views on monetary policy, she likes to hear what others have to say and likes a good give and take over policy.
When asked what keeps him awake at night, he returned to the topic of price bubbles, saying he was most concerned about finding a way to identify them and respond appropriately. He feels the Fed responded very effectively to the Great Recession once it got started, but could have done more to think ahead about the housing bubble that led to the downturn.
Williams also proved to have a good sense of humor and to be a good sport. He is still recovering from the Seahawks victory over the San Francisco 49ers in the NFL playoffs. "Just throw it four inches higher!" he exclaimed, in reference to the Seahawks end zone interception. Since both cities are in his district, he can pretend that either as Super Bowl Champion works for him - but not really. Why else would he let the audience know that it was his understanding that the Mariner's season would be over by May! :}
It was an honor and pleasure to have John Williams visit campus on March 5th. It was a rare opportunity for students to hear from someone intimately involved in crafting financial and monetary policy for the US.