The CEE presentation “Economists on the Economy” on October 6 offers a great opportunity to see how Loretta Mester, Cleveland Federal Reserve Bank President, views the current economic situation and the Fed’s role. Mester's message to listeners was clear.  “We can’t let wishful thinking drive our policy decisions…we need compelling evidence.”

EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons

The Headlines

The stock market seems to take a downturn every time economic data is released and Wall Street is reminded that the Fed is going to hold firm on higher interest rates for some time to come. This should not be a surprise. Every Fed official speaking on the record in recent weeks has been delivering the same message loud and clear. It is some version of “the Fed has more work to do.”

A Reuters article on the drop in job vacancies, a data point that seemed to suggest the Fed’s restrictive policies may be starting to work, quotes Raphael Bostic Atlanta Fed President, "We are still decidedly in the inflationary woods, not out of them."

Here are a few more examples from the past week or so of Fed officials delivering a similar message:

• John Williams (New York Fed President) (Reuters)
• Neil Kashkari (Minneapolis Fed President) (Bloomberg)
• Raphael Bostic (Atlanta Fed President) (Yahoo Finance)
• Charlie Evans (Chicago Fed Presiden), Chris Waller (Federal Reserve Governor) and Loretta Mester (Yahoo Finance)

The Council on Economic Education Event

You can watch the entire interview/discussion between Loretta J. Mester, CEE Board Member and President & CEO, Federal Reserve Bank of Cleveland and Rebecca Patterson, CEE Board Chair and Chief Investment Strategist, Bridgewater Associates on YouTube. If you don’t have an hour, here is a breakdown of their discussion, and you can jump around to the portions of interest. Patterson starts off with a tough question on many peoples’ minds--did the Fed wait too long to act? The questions are well thought out.  And while so much conversation involving the Fed focuses on interest rates, this discussion is enlightening because Mester takes time to explain Quantitative Tightening and the Fed Balance Sheet. If you cover this in your Econ class, you may find this to be very helpful. (~20:00 and 44:00)

• 7:45-12:30 Mester reflects back and answers the question about the Fed missing or misreading early inflation signs.
• 12:31-17:55 The conversation pivots to real time. Mester gives her views on where we are today, specifically how do we get wages to a level that is consistent with the Fed’s target of 2% inflation.
• 18:00-20:00 Patterson asks Mester to look out a year and project what the Fed might do, but Mester returns the focus to taming inflation.
• 20:01-23:45 Patterson asks Mester about the Fed’s tools, specifically about the balance sheet/Quantitative Tightening (QT) and how will the Fed know if QT is working.
• 23:46- 27:17 How does the Fed process all the economic data and how do they put the qualitative and quantitative data together as they prepare for an FOMC?
• 27:29- 29:45 What are her thoughts on pace of interest rate increases? Mester talks about the SEP, (see this recent EconExtra for more on the SEP) describes the FOMC process. Mester admits she is one of the dots above the median.
• 29:45-32:30 How does this all feed into the Financial Markets, and vice-versa? Mester distinguishes between financial market conditions and financial market functioning. There is some discussion of when/how international events play in the equation as well.
• 32:45- 36:05 In her last question for Mester, Patterson asks her to discuss why she feels it is so important for students to learn about economics and finance.
• 36:06- 37:46 The first question from participants was about where real interest rates will need to be.
• 36:47-39:50   Which measure of inflation should we be looking at? Which are more important? Mester discusses what she looks at and the importance of monitoring inflation expectations and the dispersion of these expectations, explaining the risk of embedded inflation.
• 39:51- 42:00 Mester elaborates on the dangers of embedded inflation.  “We don’t quit until we get inflation back down to 2%.”
• 42:08- 44:15 Discussion pivots to structural factors that may be driving inflation. Mester distinguishes between inflation versus relative price changes.
• 44:16-46:12 Discussion comes back to the balance sheet run off and the distinction between Treasury securities and the mortgage-backed securities run-off rates/mechanics. Mester mentions that, due to the longer maturity of the mortgage-backed securities, they may move to selling them rather than just letting them run off at some point down the road. 
• 46:13-48:44  Mester is asked about her views on the housing market slump and explains why people should not fear a repeat of 2008.
• 48:45-49:44 How does the Fed consider the money supply in the inflation picture?
• 49:45-51:50 Can the Fed get inflation to 2% without any restrictive fiscal policies? (Something with opposite impact of the stimulus packages of the pandemic.)
• 51:51-55:15   How much of a lag should people expect between monetary policy actions and the economy responding? “We can’t let wishful thinking drive our policy decisions…we need compelling evidence.”
• 55:15-57:22 The last question asked was about energy prices and OPEC’s move this week. Can Fed do anything specifically about this?

Lesson Ideas

Have students watch the video with this timeline/summary and then summarize Mester’s answers. This could be done as an individual assignment, in small groups or as a class, stopping between questions to discuss and/or record them.

Here are a few general questions you could ask as well.

• What does Mester mean when she says, “The pain of inflation is greater than the potential pain of increased unemployment.”
• Why do you think the market keeps hoping the Fed will back off every time there is a remotely positive piece of economic data?
• What is embedded inflation, and why is it dangerous?
• After watching the entire interview, do you have a better understanding of what the Fed is thinking and how they make their decisions at the FOMC?

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.