Being the Fed chief isn’t easy, as Ben Bernanke will testify. But do you have anything even remotely enough to be considered for the job? Get on to the website of the San Francisco Fed (http://www.frbsf.org/education/activities/chairman/index.html) and there’s a game to help you figure out if you have it in you. ‘So you want to be in charge of monetary policy?’, it asks you in letters that get bigger and bigger before they fade away? Click on the screen and the exercise is pretty simple — you just have to keep inflation and unemployment levels at what’s called the ‘normal’ level (2 per cent for inflation and 5 per cent for unemployment) and the tool you have is the Fed Funds rate.
So, since we know lower interest rates stimulate production, it is obviously a good idea to lower rates … as more goods are produced, unemployment will fall and as more goods are produced, so will prices. How difficult is that? You start off with a 4.75 Fed Funds rate and inflation of 2.14 and unemployment of 4.75 per cent. So let’s lower the Fed rate to 0.5 per cent — unemployment barely moves to 4.69 per cent but inflation rises to 2.26 per cent and the US Times (they have no Business Standard in the game!) headlines “Rising inflation fears” and says “experts say interest rates must go higher”. So, you raise interest rates and inflation rises but unemployment falls. The same Fed Fund rates of 4.75 per cent can give you dramatically different inflation and unemployment results in different periods of the game! Just as well, we suppose, that you aren’t the Fed chief.
