Public Speaking via Angels and Adrenaline
On my most harrowing and, ultimately, most satisfying speech
WHEN ANGELS SANG OF INTEREST RATES
Sometime around 1996, a university professor invited me to deliver a lecture, and when I stepped up before my large and distinguished audience, I had no clue what I was going to say and didn’t even have a topic in mind. It was like one of those recurring dreams where you are back in college, about to take a final exam, and you realize that you have forgotten to attend class all semester and haven’t read any of the class materials. AND, you are hoping that no one in the classroom notices that you are wearing footie pajamas adorned with little horses. As explained below, the Fates and the Virginia State Police had conspired to bring about this unhappy circumstance.
For approximately two hours, I stood silently at the lectern, staring out across the assembled faculty and students. My brain repeatedly made a sound something like this:
Actually, this period of staring probably lasted around ten seconds, but it seemed like two hours to me. My first impulse was to simply ask, “Are there any questions?” as that strategem seemed likeliest to provide me with, at least, a topic for my discussion. But before resorting to that act of desperation, I chanced to glance down at my attache case and saw within it a document that I had brought, bearing the words “interest rates.” Suddenly, a chorus of angels burst into the “Hallelujah” chorus from Handel’s Messiah, and a member of the chorus (no doubt one of the defunct economists described by John Maynard Keynes) began whispering a speech to me, word by word. A firehose of adrenaline coursed through my body, I raised an index finger to the heavens, and boomed out, simply, “DOES … THE FED … DRIVE … INTEREST RATES?”
For 15 to 20 minutes, I delivered one of the most flawless lectures of my career—logical, organized, passionate, fluid, and devoid of hesitation—no ummms or ahhhs or breaks in my cadence. I spoke with the fervor of a country preacher. As I drew to a close, there was enthusiastic applause, followed by 30 to 40 minutes of rapid-fire, invigorating questions and answers.
I’m usually at ease speaking extemporaneously, but my impromptu remarks always spring either from a pre-planned outline or from a question posed by someone in the audience. This talk sprang autonomously from a gaping void in the firmament. As I stepped away from the lectern at the end, I asked myself, “How the Hell did I do that?”
When I returned to my office, I sat down at the keyboard and asked the defunct economist/angel to dictate a shortened version of the lecture, which he graciously did. The resulting essay, published in early 1997, is reproduced in the LAGNIAPPE section below. In the talk, I equated the Fed to someone driving an automobile, interest rates to the driver’s accelerator pedal, and the economy to the topography over which he is driving—an analogy that had never once occurred to me before the words began to flow forth from my mouth that day.
You might well be asking yourself why I would show up for such an event so grievously unprepared. Good question.
The professor who invited me said I would be speaking to his class in monetary economics. I asked how many students were in the class, and he said there were maybe 6 or 7 students. With an audience like that, I prefer to offer some relatively brief introductory remarks, followed by an hour or so of back-and-forth conversation. Departing from the Federal Reserve Bank of Richmond at around 9:30 am, I had not yet decided what to talk about. But no matter. Christopher Newport University, where I would deliver my lecture at noon, was a mere hour to the east. Some of my best “writing” is done while driving or walking or swimming, so I would spend 20-30 minutes during the drive thinking my thoughts, arrive at the university, get a cup of coffee, and transfer those thoughts to a few index cards. No sweat.
Halfway to Newport News, as I had just begun to do my “writing,” a wreck up ahead brought traffic on the interstate to a halt—and my thoughts turned from economics to irritation with traffic. We sat and sat and sat, and time rolled by on my watch. Anxiety took hold, and I began calculating how much time I would have to get to the university, scribble down my notes, and get to the classroom. Eventually, I feared whether I would arrive on time at all, much less have time to prepare my notes.
In desperation, I decided to illegally cross the median strip, head westward, and take a country road eastward to Newport News—uncharacteristic of me, as I am a good law-abiding citizen. Of course, the moment I did this, a siren screamed out and a state trooper gave me a hefty ticket and escorted me back into the eastbound lanes of the interstate.
Traffic eventually began flowing, but it was now iffy whether I would be on time. (This was before GPS, and I was also trying to plot out routes from a map book as I drove.) Panic precluded any thinking about economics, and there would be no time for coffee and preparing notes. No matter, I thought. I can fake it, and if I do badly, I’ll only irritate 6 or 7 students and their disappointed professor.
A few minutes before noon, I pulled into the campus, only to find that parking spaces for visitors were few in number and full up. I did not yet own a cell phone and used the Fed’s phone to call a student liaison, who was busy panicking over my absence. He ran to where the car was, led me to a space, and then dragged me—running—across campus.
When I got to the building, he explained that the professor had ginned up considerable interest in my talk and moved the venue from the classroom to a lecture hall. I strode in at noon sharp, facing an audience of approximately 75-100 students and professors, including the dean of business.
The professor introduced me to the audience, I stepped to the lectern, my brain made its electronic buzzing, and then … the angels began to sing and the adrenaline began to flow. 28 years later, I still ask myself, “How the HELL did I do that?
Following is the slightly shortened version of my lecture which, I think still holds up pretty well after 27+ years. Keynes famously wrote:
“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
My sincere thanks to whichever defunct scribbler whispered in my ear that day.
DOES THE FED DRIVE INTEREST RATES?
by Robert F. Graboyes
The following originally appeared in the Federal Reserve Bank of Richmond’s EQUILIBRIA #1 (1996/97) while the author was Economist & Director of Education at the bank.
Interest rates exert tremendous influences on our daily lives—some obvious and some obscure. Helping students to understand interest rates and the Federal Reserve's connection to those rates is a challenge. That challenge is made harder by some erroneous notions—namely, that the Fed controls most interest rates and has wide latitude in setting those rates. In fact, the Fed has little or no control over most of the economy’s many interest rates. And the job of controlling inflation leaves the Fed relatively little latitude over its interest rate policy.
An interest rate is the price that one person or firm pays another to borrow money for a period of time. Our economy has a multitude of rates—home mortgage rates, credit card rates, car loan rates, Treasury bond rates, savings account rates, and so on. Loans that must be paid within a year, such as credit card loans, are called “short-term,” and their lenders charge short-term interest rates. Loans of longer than a year, such as car loans and home mortgages, are called “medium- or long-term” loans, and they carry medium- or long-term interest rates.
High long-term rates slow the economy by discouraging companies and individuals from investing in new factories and houses and other productive endeavors (because some investors will ask, “Why build a factory when I can earn more by leaving my money in the bank?”). Simply stated, the Fed cannot control medium- and long-term rates. Like the prices of apples and Mickey Mantle baseball cards, supply and demand determine long-term rates. Short-term interest rates also affect the spending decisions of people and firms.
Short-term rates strongly affect inflation, and that is where the Fed comes into the picture. As a general rule, reducing short-term interest rates increases inflation, and raising short-term rates reduces inflation. This powerful relationship forms the core of the Federal Reserve’s monetary policy. The Fed directly controls one short-term rate (the discount rate) and indirectly controls another (the Fed Funds rate). Its control over these two rates strongly influences (but does not control) other short-term rates, and the Fed uses this influence as its primary lever for controlling inflation.
A key point that emerges from this relationship is that the Fed cannot target interest rates and the inflation rate separately. If the Fed wishes to maintain a certain inflation rate, then it must keep short-term interest rates just high enough—not higher and not lower—to yield that target inflation rate. Alternatively, if policymakers decide to maintain short-term interest rates at a certain level, then they have to accept whatever inflation rate results.
One way to explain the relationship between interest rates and the inflation rate to students is by way of analogy. We can say that interest rates are to the inflation rate what an accelerator pedal is to the speed of a car. A driver has the power to determine how far from the floor his accelerator pedal will be. If he decides that the pedal should be down on the floor, his car will attain high speeds (and he may ram the car in front). If he decides that the pedal should be, say, four inches from the floor, then his car will move very slowly (and the cars behind may honk their horns).
Similarly, the Fed may decide to press its accelerator pedal down to the floor (by pushing down short-term interest rates). Then, inflation will go to high speed and the economy will suffer. Or, the Fed may lift its accelerator pedal four inches off the floor (by raising short-term interest rates), thus slowing the economy’s engine and inflation.
If a driver is surrounded by cars moving at exactly 55 miles per hour on a flat roadway, then he must keep his accelerator, say, two inches above the floor—no more and no less. In a physical sense, the driver controls the pedal’s distance from the floor. But in another sense, the cars surrounding him determine where his pedal will be, and the driver’s foot simply follows orders. Equivalently, if the Fed seeks a 3 percent inflation rate, it controls the mechanisms that determine short-term interest rates; but it is the inflation target of 3 percent, and not mere whim, that tells the Fed where short-term rates must be.
As we know, the rules of the road are not this simple for the car or for the Fed. A newspaper might describe the following chronology:
Inflation remained steady at 3 percent between January and June;
The Fed raised short-term interest rates on July 1; and
Inflation again remained steady at 3 percent from July to December. The reader might ask whether it was no longer true that higher interest rates slow down inflation.
For a possible answer to this conundrum, let’s return to the automobile analogy. Suppose an auto is driving on a level plateau at exactly 55 miles per hour, during which time the accelerator pedal is exactly two inches from the floor. Now, suppose the road suddenly begins to descend toward the ocean. The driver eases off the accelerator pedal until it is three inches above the floor, and the car continues at exactly 55 miles per hour; the road’s downward slope exactly offsets the reduced engine power. It is still true that letting up on the accelerator slows the car, but the relationship between speed and the position of the pedal is more complicated on hilly terrain.
The economy has its hills and mountains, too. And the Fed must take into account the shape of the economic “terrain” as it influences short-term interest rates. The previous newspaper account might be explained in the following fashion: the real economy (employment, production, etc.) was steady from January to June. In late June, however, Fed economists saw signs that the economy was overheating and estimated that if short-term interest rates were left unchanged, inflation would rise to 3.5 percent. Instead, the Fed eased up on its accelerator (by raising short-term interest rates), thus stopping the incipient rise in inflation. So, the impact of short-term rates on inflation has not changed. Only the economy’s terrain has. Estimating the shape of this economic terrain is, in fact, an important part of the job of Fed economists.
Perhaps this analogy will help the economics teacher get a bit of mileage out of the students' drivers ed class. And maybe the econ teacher can be a positive influence on the students’ driving habits. Who knows?
A remarkable and pleasant coincidence this Sunday! Two of my favorite Substack writers with columns on a similar topic - Prof. Graboyes with this article and Douglas Murray in this morning’s Free Press on RFK’s extemporaneous speech on the eve of the murder of Martin Luther King.
Having been in the uncomfortable position of having to speak in front of a large gathering without adequate preparation myself, I can sympathize with both gentlemen as well as attest to the fact that perhaps there are angels standing at the ready to jump in to assist when needed.
> Equivalently, if the Fed seeks a 3 percent inflation rate, it controls the mechanisms that determine short-term interest rates; but it is the inflation target of 3 percent, and not mere whim, that tells the Fed where short-term rates must be.
Here's the part I've never understood. Half of the Fed's statutory dual mandate is "price stability." Given that "stable" means "unchanging" and "resistant to being moved," from where does the Fed get the idea that it has any authority to target any inflation rate other than 0%?