Former board member’s take on the Fed
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Kai Ryssdal: Interesting that Steve (Henn) mentioned interesting because interest rates are one of the tools the Fed has to manage the aftermath of the financial crisis. Frederic Mishkin teaches at the Graduate School of Business at Columbia University. More importantly, until about a month ago, he was a member of the Board of the Federal Reserve.
Welcome to the program.
Frederic Mishkin: Good to be here.
Ryssdal: I’d love your thoughts, for a second, on the timing of where we are in the economy. Have we made turn from planning this bailout to managing the recession?
Mishkin: We can’t know that yet. Clearly we are in the throes of a major financial crisis, and there’s been very large government interventions, not just in the United States but also abroad. But we don’t know whether they’re going to completely work yet, and even if they do work, which I’m hopeful that they will, there’s still a problem that there are long lags from what happens in terms of policies and what happens to the economy. So the negative effects of this financial crisis are going to be felt down in the future. And, indeed, even if things work, the economy could get worse.
Ryssdal: Let me call on you, then, in your role as a former member of the Board of Governors of the Federal Reserve. What are they saying to themselves these days, as they sit around that table trying to plan things out, bearing that lag you just mentioned in mind?
Mishkin: Well, I can’t tell you what they’re actually thinking right now, because I’m not sitting at the table with them. But the important thing is that when you do monetary policy, you have to ask yourself not just what’s happening today, but ask yourself what you thing is going to happen down the road. Because monetary policy takes a long time to have its effects. So what you have to do is you have to think about where you want things a year, two years down the road. And that’s how you have to set monetary policy today.
Ryssdal: Monetary policy being interest rates, of course.
Mishkin: Setting, right, setting the Federal Funds rate is the main tool of monetary policy.
Ryssdal: One of the things the Fed does when it sets that rate is it looks at inflation, right? Chairman Bernanke is well known to have a special affection for the inflation number.
Mishkin: Absolutely. A central bank always has to worry about price stability. In the long run, that’s the most important thing that it does. Clearly, in the short run it also has to worry about other things as well, in particular, keeping the economy at an even keel and also making sure that, in fact, the financial system doesn’t blow up.
Ryssdal: Well, then, look at the number that was out today that showed consumer prices essentially flat. What does that tell you about what the Fed might be planning?
Mishkin: One of the key issues has been that inflation has actually been very high recently, but there have been very temporary influences on this. This was the fact that we had this huge run up in oil prices, and oil prices have come down from over $140 a barrel to below $80. And you can see it at the gas pump. It was a great pleasure just filled up yesterday, and I felt pretty good that I was paying well under $4 a gallon. That’s something that I haven’t seen in a long time, particularly in New York where I am where they have high taxes on gasoline.
Ryssdal: What’s next in this scenario?
Mishkin: Always hard to know. There has been some improvement in credit markets, recently, and I hope that continues. That’s really the key. What happens to the stock market is really a sideshow, even though it affects all of us because if you own stocks and they go down, you feel poor. That’s certainly has happened to me. But the real issue is are the credit markets going to get working again. If the credit markets get working again, the economy will bounce back and we will not have a severe recession. But if credit markets take a long time to come back, then we’ll have more problems.
Ryssdal: Frederic Mishkin at the Graduate School of Business at Columbia University, also formerly of the Board of Governors of the Federal Reserve Bank of the United States. Professor, thanks a lot for your time.
Mishkin: You’re very welcome.
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