Volume 15, Issue 1

September 2012
EDITOR
Dr. Greg Delemeester
Professor of Economics
Marietta College

Striving for Balance

By: Alex Cavanagh

Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, gave

a presentation entitled The Fed and the Economy: Striving for Balance, at the
April 2 meeting of the Economic Roundtable of the Ohio Valley, held at the Lafayette Hotel in Marietta, Ohio. Ms. Pianalto also spoke on a similar topic for her deASSISTANT EDITORS
Shaylyn Allen, C14
livery of the annual Milton Friedman Lecture at Marietta College the previous eveAlex Cavanagh, C15
ning.
Ms. Pianalto began
Special thanks to
her presentation by defining a
Dr. Jacqueline Khorassani &
few terms and discussing the
Tom Perry
history of the Fed. She described inflation in the words
On the web @
of Milton Freidman, too much
economicroundtable.org
money chasing too few goods.
Inflation is a monetary phenomenon that can be influenced directly with monetary
policy. She also stressed the
definition of maximum employment, which she argued is
94 to 95 percent of the labor
Inside
force working.
This
The Federal Reserve
Issue
Bank system originated in
1913 and is responsible for
maintaining a safe, stable, and
Photo by Tom Perry
flexible monetary system. The
Striving for Balance Federal Reserve system is broken down into 12 districts, each with their own Reserve Bank, and with Cleveland serving as headquarters for the Fourth District.
Ms. Pianalto is also a voting member of the Federal Open Market Committee,
or
FOMC.
The FOMC is a body within the Federal Reserve that is charged with
Upcoming Speakers
the responsibilities of maintaining stable prices and promoting maximum employment. The voting members of the FOMC consist of five of the 12 presidents of the
Federal Reserve districts and the members of a seven person, presidentially ap Airline Industry
pointed, board. The presidents of the individual districts share voting rights on rotating years.
The FOMC decides and sets monetary policy in order to achieve stable
ERT Leadership
prices and promote maximum employment. They hold Please turn to Pianalto, page 2

Pianalto, continued from page 1

page 2

the ability to change the rate at which banks loan each other moneyknown as the Federal Funds Rate. The Fed
primarily effects changes in the Fed Funds rate through open market operations. Under open market operations,
the Fed buys or sells short term U.S. government securities held by member banks. Another method of control is
quantitative easing. Quantitative easing is the practice of purchasing debt in the form of mortgage backed securities
from financial institutions in order to inject cash into the economy so as to stimulate economic growth.
Ms. Pianalto provided some historical context to the recent financial difficulties by recalling the period
from 1985 until 2007. Known as the Great Moderation, this period was characterized by low unemployment and
small, controllable recessions. As most are well aware, this Great Moderation came to an end in late 2007, with the
beginning of the worst recession since the Great Depression.
Pianalto recounted some of the actions that the Fed undertook in response to the recent recession. In 2007
the Federal Funds Rate was lowered and three years later in 2010, the Fed lowered the rate again to nearly zero,
where it still remains today. The FOMC has initiated two rounds of quantitative easing since the end of the Great
Moderation in 2007. During the two rounds of quantitative easing, the Feds balance sheet grew from $900 billion
to over $3 trillion dollars. Ms. Pianalto stressed that employment levels are not directly related to monetary policy,
but estimated that maximum employment is associated with an unemployment rate between 5 and 6 percent.
After discussing the background of the Federal Reserve System and its reaction to the extraordinary circumstances in the last decade, president Pianalto moved onto the outlook that she and the FOMC have for the future. When thinking about the Feds outlook for future economic conditions, it is important to think long term. The
actions of the Fed have repercussions six to 18 months down the line. Ms. Pianalto argued that the state of the
economy is improving and the growth appears to be self-sustaining. Both of these reasons led her to inform us that
the FOMC is not planning another round of quantitative easing.
Some of the positive signs she mentioned that point to self-sustaining growth are, increased employment,
reduced household debt, stronger industrial production, and the fact that banks are slowly increasing their lending.
The challenges that the FOMC foresees regarding the self-sustaining growth of the economy are government
budget pressures, the European financial situation, and rising fuel costs, all of which tends to make businesses and
consumers a bit hesitant to spend money.
Beginning this year, the Federal Reserve is attempting to improve communication and make the FOMC
more transparent by publishing a numeric goal for inflation. The FOMC is projecting 2.5% growth this year and
3% growth next year, with a 2% annual inflation for the long term. It is going to take 4-5 years at this projected
growth rate in order to reach maximum employment. With all factors in consideration, the FOMC members agree
that the current monetary policy is still the best policy for the conditions that we are in.
When asked to grade your performance, Ms. Pianalto stated that, while she would give the Federal Reserve a good grade on their objective to control inflation, they were a little further away on their goal of maximum
employment. Another question that was raised is the particular exit strategy for the long term debt that has been
taken on in the process of quantitative easing. She answered by highlighting certain tools that the Fed can use to
alleviate their debt such as: long term deposit facilities, reverse repo, and various other methods that are better outlined on the Federal Reserve website.
Ms. Pianalto is the fourth president of the Federal Reserve Bank of Cleveland to speak to the Roundtable.
She has a bachelors degree in economics from the University of Akron and a Masters in economics from The
George Washington University. She is also a graduate of the Advanced Management Program from The Fuqua
School of Business at Duke University. Prior to her nearly 30 year career with the Cleveland Fed, Ms. Pianalto was
a staff economist for the Federal Reserves Board of Governors and the Budget Committee of the U.S. Congress.

Upcoming Speakers

George Mokrzan, Director of Economics, Huntington National Bank. Date: Monday, October 17, 2012.
Location: Blennerhassett Hotel, Parkersburg. Topic: The Economy in 2012 and 2013 a Period of Heightened
Risks and Opportunities.
Pablo Vegas, President of AEP Ohio. Date: January 29, 2013. Location: Parkersburg Country Club.
Donald Boudreux, Professor of Economics, George Mason University. Date: March 4, 2013. Location:
Marietta Country Club.
Robert Rubin, Co-Chairman, Council of Foreign Relations. Date: April 10, 2013. Location: Parkersburg
Country Club.

Future of Commercial Aviation

page 3

By Shaylyn Allen
Raymond Neidl, airline and aerospace industry analyst for the Maxim Group, spoke to the Economic
Round Table of the Ohio Valley, September 11, 2012 at the Marietta Country Club. The topics of Neidls lecture
ranged from his career and background, to the development of Las Vegas, but concentrated more on the airline
industry: how it has progressed, an analysis of the current three big changes in the industry, and future possibilities.
Neidl entered the airline industry when flying was
still a pricey privilege. Franchises were heavily regulated
and had to go to the government with proof of increasing
costs to change ticket prices. Load factors, a measure of
flying capacity, were a measly 55% during the regulated
era. With the advent of deregulation during the late 1970s,
many airlines failed to survive the change, mainly due to
high labor costs associated with their labor unions. Deregulation introduced extensive price competition throughout
the industry to the point that airlines cant increase ticket
prices to cover increasing salary demands from the unions.
As a compromise, many airlines offered employee stock
ownership plans to union members, but unions still wanted
raises as well, initiating an almost complete industry-wide
bankruptcy.
After September 11, 2001, Neidl testified in front
of Congress on behalf of the airline industry. He asked for
the government to give the industry $10 million to cover
their costs from September 11th, give airline companies an
insurance guarantee, and government guaranteed loans.
Slowly, the business began to recover and unions were
working with management teams, that is, until the financial
crisis hit and the industry dive bombed.
Currently, there are three big changes happening
Photo by Greg Delemeester
throughout the industry. Firstly, the industry has shrunk
down to four major hub-and-spoke airlines. Hub-and-spoke refers to how the airlines operate their flight routes.
Typically, there are one or two central airports that all flights are connected to such as United Airlines use of the
George Bush Intercontinental Airport in Houston and Chicagos OHare. From the hub flights are sent out to end
destinations, or spokes. This model limits where companies can be competitive because of the ownership of air
routes. Say a smaller airline has to close a bank at one of their hubs, this then means that the airline has to discount
to prevent from losing money, driving ticket prices down far too low for the entire industry. In reality, the hub-and
-spoke model is truly only for larger airlines.
The second big change is that management teams are now running airlines with investors in mind. The
fact that management is investor-conscious means more investment could come if profitable flight routes are developed. Lastly, and most noticeably, airline pricing is completely different. Instead of an all-inclusive ticket,
there are now cheap tickets and add-on charges for everything else, such as luggage and meals.
Neidl argued that, for airlines to be competitive, companies need to find their niche in the industry.
Alaska Air, for example, primarily serves the west coast, while Jet Blue focuses primarily on backpackers for business. New business models are also appearing, such as the one employed by Allegiant, which is marketing as a
travel company instead of an airline company. Allegiant flies 2-3 times a week to what the company calls
pleasure cities. These major destination tickets are cheaper than any other airline, but once you buy the ticket, it
is yours, for good. Allegiant does charge for everything the company offers, hotel reservations, car rentals, tours
and many other tourist accommodations. In fact, the majority of the companys profit comes from these add-ons
and not the ticket price. According to Neidl, there is a rumor that Allegiant will have competition soon in this new
business model.
Neidl also made some predictions for the near future of the airline industry. Come January 1st, a potential
recession due to the fiscal cliff could slow down the recent growth that the indus- Please turn to Neidl, page 3

Neidl, continued from page 3

page 4

try has experienced. American Airlines is also going through bankruptcy and it would be best for the entire industry for a merger to take place with US Airways, even if it would be a difficult integration of policies for consumers
for the first year or two. Neidl predicted that if the merger did not take place that there would be no place for US
Airways in the industry in about two years. Also, smaller cities are losing service due to increasing costs, so for
the rural folks there will be a longer drive to a major airport.
Neidl closed his talk by arguing that the four large airlines running on a hub-and-spoke model are able to
fulfill the traditional needs of most any flier. Niche carriers are able to exert some competitive pressures by serving a particular area or customer or price range. Also, new business models are allowing different types of carriers
to break into the industry successfully. We have an industry that can make money, good times or bad, said Neidl.
Regardless of the potential recession next year, it is safe to say the airline industry is soaring.

Change in Economic Roundtable Leadership

Dr. Jacqueline Khorassani, Professor of Economics at Marietta College, stepped down from her role as
chair of the Economic Roundtable with the conclusion of the 2011-2012 academic year. Dr. Khorassani was
elected to serve as the Chair of the Roundtable after the passing of Dr. Bert Glaze in 2004. David Mead, Professor
of Accounting at Marietta College, was elected as the Roundtables new chairman.
"I would like to express my gratitude to the members and the sponsors of the Economic Roundtable for
their support and encouragement during the past eight years," says Khorassani. "My sincere thanks also go to Marietta College and West Virginia University at Parkersburg for their financial support through their scholarship programs. I am also very thankful to the members of the Board of Directors and the Officers of the ERT for their cooperation and assistance. I wish David Mead and the ERT's entire leadership team the
best in coming years."
Mead added, "I am pleased to take on the role of chair on
behalf of Marietta College. There is tremendous support and interest for the Economic Roundtable by businesses of all kinds in our
area. It seems that people truly appreciate the opportunity to hear
renowned speakers who are able to come to our region. The organization is run by a volunteer board and officers who work hard
to continue the mission of the Roundtable."
The newly elected officers are:
David Mead, Chair
Kristopher Justice, President
Jeff Welch, Vice President of Membership and Advancement
Orvie Fischer, Vice President of Finance/Treasurer
Greg Delemeester, Vice President of Programs
Larry Johnson, Secretary
Dr. Khorassani was presented with a hand Frances Reichardt, Registrar
crafted engraved vase in appreciation for her
dedicated service to the ERT. Standing left to
A complete list of the Board of Directors is available online at
right are Sandra Pianalto, Jacqueline Khoraswww.economicroundtable.org.
sani, and Bob Kent.
Note: The above quotes are from a news article published online at
http://www.marietta.edu/departments/Business_and_Economics/news.html

Note: The opinions expressed in MACRO & micro do not necessarily represent the opinions of the ERT or the
B&E Department at Marietta College.