I was a teenage Gramlich

By JIM NEWELL  |  April 4, 2012

But not everything went according to plan. Fed Challenge is, in the words of our gracious and still active economics teacher at Severn School in Severna Park, Maryland, Mr. Bodley, "a national economics competition that encourages a better understanding of our nation's central bank." Mr. Bodley— as his former high-school student, I can't possibly refer to him any other way — wrote this in a 1998–1999 edition of the Federal Reserve Bank of Richmond's PR publication, Equilibria. Here is how he laid out the basic Challenge procedure:

A team of five students prepares and presents a 15-minute analysis of the US economy, recommends a course of action with respect to interest rates, and then withstands a 10-minute question-and-answer period from a panel of Federal Reserve economists. To prepare for the competition, students look at the same economic indicators and the same forces influencing the economy that our nation's economic leaders examine.

And to lend extra verisimilitude to the whole proceeding, competitors are also advised, as we were, to act out the parts of real members of the Federal Open Market Committee.

The idea at its simplest, at least when I was competing, was to imbue the next generation of American leaders with a grasp of the complexities of macroeconomic management — measuring the threat of inflation against the jobs outlook, taking stock of the curious twists and turns of consumer demand, the credit market, and this strange, robust creature known as the housing boom.

This was a tricky, moderately worrisome moment for the American economy. The 2000–2001 tech bubble recession was safely in the rearview, but the country's economic performance remained sluggish. Corporations had recapitalized and labor productivity was high, but the unemployment rate was stuck near six percent — not bad by historical standards, but weak by the expectations that had built up over the '90s boom.

That's why Federal Reserve Chairman Alan Greenspan, the revered free-market galoot who had come personally to assume most of Washington's economic policy-making power over the previous decades with frighteningly little complaint from the quislings in Congress, was still keeping the Fed funds rate at 1.25 percent, a 40-year low, several years after the economy had stopped receding. The rate couldn't stay so low for much longer — unless, that is, the dynamic maestro Greenspan decided on the flip of a coin, without consulting anyone else, that it could.

There were, to be sure, some encouraging countervailing trends. The Iraq war was in the process of being "successfully resolved," as a significant number of economists and trusted newspaper pundits were arguing. And since the Iraqi endgame had lurched placidly into gear without blowing up the price of oil, rapid growth more consistent with historic recovery patterns seemed set to launch.

Market uncertainty over Iraq — maybe that was the big hang-up all along. Right? It sounded just savvy enough to be true, in Washington, and so my team adopted this bold case as the main determinant for monetary policy moving forward.

BECOMING BERNANKE

Our judges that muggy April day inside the Marriner S. Eccles Federal Reserve building were three marquee economic sages who took time out of their busy schedules to feign interest in our presentation: Federal Reserve board governors Ben Bernanke and Ed Gramlich and Dallas bank president Bob McTeer.

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