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Charles Deutsch ’02 (Providence, R.I.), an economics and business major, is conducting an honors thesis to uncover how the Federal Reserve Board determines its monetary policy.
The senior has a job lined up as a credit analyst for MBIA Corp. after graduation.
Deutsch, who presented his findings to date at the 16th annual National Conference on Undergraduate Research last weekend, wants to know whether the Fed weighs the rise and fall of the stock market in its decision-making and, for that matter, if it should pay attention to stocks. Edward N. Gamber, associate professor of economics and business, is advising the thesis.
The Fed’s main purpose in directing the nation’s central banking system is to promote maximum growth of the economy while keeping inflation low and stable. However, according to Gamber, the members of the Fed’s board of governors make their monetary policy decisions in secret, attributing their moves to “a number of factors.” Economists must speculate on which ones the board considered.
“Usually they have a set formula regarding short-term interest rates,” says Deutsch. “My paper considers whether we have to include assets, specifically the stock market, and whether the Fed includes it as an indication of how they conduct policy.”
According to Deutsch, a lot of the data that the Fed works with take a significant amount of time — six to 12 months — to gather, and later those numbers are revised, so board members are basing their policy decisions on snapshots of the economy that may not be completely accurate.
“The stock market is a real-time indicator of our economy — how we’ve changed since the last policy decision,” he says. “The economy functions on the flow of information and can react instantaneously. Market reports can offer a short-term gauge.”
Gamber says Deutsch seems to have found that the Fed appeared to react to the stock market in the late 1990s, which is consistent with anecdotal evidence. He says its concern was inflationary pressures that investor spending fueled.
“The biggest benefit of an honors thesis is to find out how difficult real-world questions are to answer,” says Gamber. “Often what you find is messy, imprecise and ambiguous. It’s humbling but very valuable when you find out how completely difficult it is, but to remain optimistic anyway. You can’t always expect to have earth-shattering results.”
When he began, Deutsch was unsure of what he would gain from the experience, except that it would make him an expert in at least one subject. It has turned out to be very fulfilling.
“Professor Gamber is stern yet nice, motivating and helpful,” says Deutsch, who one day plans to get an MBA.
Gamber says the project so far has “turned out great. What’s good is that he’s taken a systematic look at the subject.”
A graduate of The Moses Brown School, Deutsch is a member of Zeta Psi fraternity and Omicron Delta Epsilon, the economics and business honor society. He is also involved in intramural sports.
A National Leader in Undergraduate Research. Charles Deutsch ’02 made a presentation on honors research he did under the guidance of Ed Gamber, associate professor of economics and business, at the National Conference on Undergraduate Research.