With the Federal Reserve potentially poised to raise short-term interest rates for the first time in nine years, we asked former chair of the Federal Reserve Bank of Boston’s Board of Directors Kirk Sykes (OPM 26, 1998)—current president and managing director of the Urban Strategy America Fund—to field your questions about the inner workings of America’s central bank.

Do members of the Fed pay attention to media speculation? How do they deal with a situation where the speculation is going in the wrong direction and will likely result in a “surprise” to the markets when announced? Would they prefer to avoid surprises, or do surprises sometimes serve a purpose?
—Wendy Stahl (MBA 1981)

I wouldn’t say there’s a big focus on “media speculation” per se, but Fed officials have to be attuned to market sentiment, and they consume a great deal of information. Fed policies work through financial markets. Sometimes it makes sense for Fed communications to clarify intentions, hoping that will align market expectations with its policy views. But in some cases, markets just disagree with Fed approaches, and there’s not much they can do about that. The Fed isn’t generally in favor of surprises, I’d say, but can’t always avoid them.

To what extent do the worsening EU economic prospects and declining oil price outlook influence the timing and pace of the Fed interest rate normalization?
—Tongurai Limpiti (AMP 181, 2011)

One of the best things about serving on the board of directors at a regional Reserve Bank is hearing the economic updates from the staff economists. I suspect that the economists at the Boston Fed might say that a weaker EU economy suggests somewhat weaker US growth, since many US exporters depend on sales to the EU region. The oil price outlook matters, too, because it affects both the path of inflation and the path of spending. Because these factors matter for the Fed’s outlook on spending, employment, and inflation, I would imagine that they could influence the timing and pace of the Fed’s interest rate policies. Let me stress that within the Fed there is tremendous focus on empirical data—on ensuring that policymaking is “data dependent.” So I would think the Fed might adjust the timing depending on how strong the economy is in the next several months.

Many commentators in the media seem to think that by lowering interest rates, the Fed will necessarily cause inflation. I think that if low-cost foreign competition keeps product prices and wages low, US companies won’t be able to raise prices and wages, so inflation will be limited. What’s the Fed’s view on this issue?
—Gordon E. Olson (MBA 1975)

I think you see a mixture of views among Fed policymakers, but I know that the Boston Fed has studied the significant degree of labor market “slack” and the absence of any significant increase in wage pressures, suggesting that inflation will remain well contained for the near term. The Fed spends a good deal of time watching inflation expectations data, as those seem to feed into and anchor inflation over time.

Why wouldn’t it be good to get short-term interest rates up to at least 2 or 3 percent? There seems to be too much cheap money flowing around now, and unused funds earn nothing at this point (in fact slightly negative, adjusted for inflation).
—Bob McIntyre (MBA 1964)

When I served on the Boston Fed’s board of directors, we often discussed the reality that pushing rates up too precipitously would risk cutting off the recovery before we’re at full employment. I think Boston Fed economists would say that it would be great to operate in an economy in which rates of return were more normalized. But the best way for that to happen is for the Fed to allow the economy to improve. Since the financial crisis, the Boston Fed’s leadership has been consistent—and correct—in arguing that policy could be accommodative and patient in moving off that stance.

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