Scaling Back the Fed's Emergency Steps

The chief policy officer for the Federal Reserve of Cleveland sits down for an exclusive Q&A with IndustryWeek.

Last week, IndustryWeek ran the first of a two-part interview with Mark Sniderman, executive vice president at the Federal Reserve Bank of Cleveland.

Sniderman spoke about the size and breadth of the economic recession, the innate caution many companies are feeling at the start of the economic recovery and the new lending strategies the banking community has taken on.

Though recent news suggests the U.S. economy is steadily improving, questions continue to swirl around the extraordinary steps the Fed has taken in the last 18 months in stabilizing the economy and when the bank will scale back its efforts.

Sniderman spoke to IW about the Fed's exit strategy, the importance of the U.S. balancing a manufacturing- and consumer-based economy and the stability of U.S. dollars for manufacturing. Edited excerpts:

IndustryWeek: With unemployment high and inflation low, the Fed has kept interest at near-zero rates. How long can this be sustained, while keeping inflation in check?

Mark Sniderman: We're been talking a lot about what is commonly called the exit strategy for monetary policy. And what is typically meant by that term is during the course of dealing with the financial crisis, we've taken some very aggressive steps to provide liquidity and support to the broader economy. That has put us into this very highly stimulative position, where we have a balance sheet that's much larger than we typically would have because we've expanded credit to the financial system.

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IW: So what is the challenge in implementing this exit strategy?

MS: As the economic environment has stabilized and as it continues to gather strength over time, we're going to have to find a way in step with that to gradually scale back to the point where we're at a pre-crisis environment. That means a more normal-sized balance sheet and using our more normal methods of doing business. The challenge is, we haven't ever been in this position before and we're going to be relying on some tools and techniques we haven't used before. We're going to have to be particularly attentive to how well those tools are working as we go through this. And we're going to have to be attentive to the communication around all this, so that people understand what we're doing, why we're doing it and don't confuse the reasons for certain actions we're taking.

IW: What's been the approach so far in rolling out these new measures?

MS: Well, I liken it to military parades, where countries are showcasing all their troops and weapons before these crowds. They're not really sending their troops into battle. They're just showing people their army -- that they have troops and weapons. We're trying to be very deliberate and overt about what we're doing and preparing ourselves for the time when we may actually need to deploy these things on a larger scale.

IW: Many have said that the U.S. is increasingly shifting from a goods-based economy to one that's far more consumer-based. What is the danger in this?

MS: What people want, really, is consumption. They don't want to invest. They want to be on vacation all the time, having more stuff, more sports cars. But there's no way to sustain a high level of consumption without investment in things like new plant equipment, which makes us a more productive society and allows for things we want to be more affordable. So what you have is a back-and-forth, an eco-system of sorts. The problem is, during this past business peak cycle you had the amount of personal saving at almost zero and a huge amount of investment that was going on in the business sector. Where were businesses finding the funds to support all that investment? From the rest of the world. And it's hard to sustain that over a long period of time. At a certain point, the rest of the world is going to decide to change the terms and conditions on which it's willing to supply all those funds.

IW: What role does a stable currency have in helping U.S. manufacturers? Does the Fed have a preference for a stable currency and if not, why?

MS: The policies related to the exchange value of the dollar are really under the privy of the Treasury. But I would say that through controlling the rate of inflation, the Fed has a responsibility to keep the purchasing power of the dollar as stable as possible. What we focus on fundamentally is the dual mandate of price stability and keeping the economy running on an even keel so that resources are close to fully employed. There are a whole range of initiatives that governments can pursue to help certain aspects of their economy. But that's not what nations should be looking to their central banks for.

IW: In recent decades, certain regions of the country have seen rapid growth and development, especially in the South, which is out-pacing other regions and is likely to grow more disparate in the future. Is this a concern at the Fed?

MS: I think of that as a really good example of there being so many other forces that are at work when it comes to resource allocation. Some people have said that the advent of air conditioning and cheap electrical power is the fundamental driver in this huge population shift in the U.S. that's been taking place over the last 50 years. You had the large military contracts around World War II that helped build up places like Los Angeles and the development of the interstate highway system. Far be it from the central bank to somehow want to get involved in this and say, wait a minute, there's too many people below the Mason-Dixon Line. I think there's more than enough for us to deal with.

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