Inside the Fed Featured

5:42pm EDT October 20, 2004
Every CEO dreams of sitting on a pile of cash. Michael H. Moskow experiences it every day.

As president of the Federal Reserve Bank of Chicago, Moskow oversees an organization that receives $17.5 million in new currency a day from the Bureau of Engraving and Printing and maintains between $7 billion and $10 billion in its vaults -- in cash.

But as impressive as those numbers are, the eighth president of the Chicago Fed insists that the most important role his organization performs doesn't involve so much as a single greenback.

"The Fed function that most likely has the greatest impact on the day-to-day operations of most businesses is our role in helping the nation's payments system run efficiently and smoothly," says Moskow. "We help make sure that when a business accepts a noncash payment -- like a check or a credit card -- they'll get the funds associated with that transaction."

Consider that the Chicago Fed processed $1.7 trillion in checks last year, compared with $52.5 billion in cash, and Moskow's reasoning is clear. What's more, the Fed provides these services much like a private business.

"Business owners often don't realize that we provide electronic and check processing services to banks, credit unions and thrifts, and that we charge a 'price' for those services in order to compete head-to-head with the private sector," he says.

Hearing such practical talk from a Fed banker might seem out of place. But despite spending years as a professor at four colleges and in five senior government posts (all requiring Senate confirmation), Moskow has substantial private-sector credentials, including executive positions at several Chicago-area companies including Esmark Inc., Velsicol Chemical Corp., Dart and Kraft Inc. and Premark International Inc.


A private perspective

With 1,921 employees dealing with 3,149 depository institutions -- the Seventh Federal Reserve District covers all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin -- Moskow has little choice but to run his government organization like a business.

"Working in the private sector allowed me to bring an important perspective to an organization like the Chicago Fed, that is, never rest on your laurels," Moskow says. "In the private sector, being accountable on a daily basis to customers and shareholders is part of doing business."

And that work ethic applies to the Fed, as well.

"Perhaps the biggest difference between Chicago Fed employees and private sector employees is a commitment to public service," he says. "Chicago Fed employees are well-trained professionals who, for a variety of reasons, are motivated by knowing that their work at the central bank is vitally important to the nation's financial system and its economy. Understanding that difference is important, and adjusting your management style to fit that profile is critical to success. I'm proud to say that the Fed is made up of people who are committed to providing value to customers while serving the public interest.

"Having said that," he adds, "I think that managing change in the bank's culture taught me to set clear goals and objectives, involve everyone in the process and allow everyone to share in the successful transformation."

While such nuts-and-bolts management is Moskow's stock in trade, it is another aspect of his job that impresses outsiders the most: helping U.S. Federal Reserve Chairman Alan Greenspan set the monetary policy of the country.

Many people associate the Federal Reserve System solely with Greenspan, whose comments can make stock and bond markets sink or soar. In fact, Moskow and three fellow Federal Bank presidents help make key Fed decisions through the Federal Open Market Committee (FOMC), which meets eight times a year to review economic and financial conditions, determine the appropriate stance of monetary policy and assess the risks to the Fed's long-run goals of price stability and sustainable economic growth.

"Before each FOMC meeting, we look at a wide range of economic indicators, and we talk to a number of business contacts to get both quantitative and qualitative perspectives on current and future economic conditions," Moskow says. "The members of the Board of Governors tend to focus on national conditions. As the president of a District Bank, I monitor both the national and regional economy. At the Chicago Fed, we use all of that information to develop our own forecast of the economy, and based on the forecast, what we think might be an appropriate stance for policy."

Given the complicated nature of the national economy and the variations in each region of the country, it would be natural to think there is a great deal of disagreement among board members.

But that's simply not the case, Moskow says.

"Prior to each meeting, the Board of Governors staff produces their own forecast and policy options. The process of reaching a policy decision is very collaborative and relies on consensus-building," he says. "At each FOMC meeting, every member is expected to voice his or her personal view on the economy. Based on those comments, Chairman Greenspan usually recommends a policy stance that he thinks everyone can support. After another round of discussion, we vote on the policy and reach agreement on our statement. The chairman is very adept at building a consensus, and most of our votes are unanimous.

"Any Fed chairman bears listening to. The Fed chairman, by design, has access to a wide range of economic information, and perhaps more than any other single individual has a finger on the pulse of the economy. Chairman Greenspan, in particular, has a long record of success. He has overseen the nation's longest economic expansion and an overall decline in inflation, so it's not hard to understand why he has earned the respect and attention given to him."


Key issues

The Fed's board of governors works to develop a consensus point of view. Here is a quick look at what Moskow thinks of some issues affecting the economy:


* Iraq

"Government spending on the action in Iraq contributes directly to economic activity by affecting Federal government spending," Moskow says. "The situation in Iraq could also affect the economy indirectly, if it affected business and consumer confidence and spending decisions.

"That was the case last February, when uncertainty about the conflict led many businesses to put their spending and hiring decisions on hold pending the progress of the war. Most of that uncertainty has since subsided. Of course, the price of oil is significantly influenced by conditions in Iraq and the Middle East, so that is another way the conflict can indirectly affect economic activity."


* Tax cuts

"In the short run, tax cuts can stimulate the economy," he says. "The round of tax cuts that took effect last summer was one factor. Along with accommodative monetary policy and strong productivity growth, that contributed to the economy's improvement.

"Over time, though, if a tax cut results in sustained budget deficits, those deficits could have a negative impact on the economy."


* Short-term economy

"The outlook for the rest of the year looks good," Moskow says. "Over the next 12 to 18 months, we expect the economy to expand at rates that average near or somewhat above its long-run potential while maintaining price stability. The high degree of monetary policy accommodation will no longer be necessary.

"One challenge the FOMC will face is determining the appropriate path for returning monetary policy to neutrality."


* Technology

"I have been most surprised in the last 10 years by the changes brought on by the creation and implementation of new technologies, specifically the advent of the World Wide Web," Moskow says. "I began working at the Chicago Fed in 1994, before the use of the Internet became so widespread. It was easy to see that this was an extremely useful technology that could change the world, but few people were able to predict accurately the speed at which this change would occur.

"The Fed, like so many other institutions and individuals, had to adapt to the use of the Web, to provide more and better access to information and to respond more quickly to customer needs. It's a fundamental change that has affected the way we all do business, and the speed at which Internet usage has become so pervasive worldwide surprised me, and many others, I might add."


Moskow, who took office in 1994, says his tenure at the Fed has been the most rewarding work he has done.

"I've been privileged over the years to work in government, the private sector and at several major universities," he says. "The Fed calls on skills from each of those disciplines and combines them in a stimulating work environment.

"It's one of the most interesting jobs in the world."

And it comes with a nice pile of cash. HOW TO REACH: The Federal Reserve of Chicago (312) 322-5111 or