Interest Rates May Be Higher If Monetary Policy Spoke With A Texas Twang - WSJ Blog

        By Ben Leubsdorf
        Everything's bigger in Texas. But should that include short-term interest rates?
        The Lone Star State is firmly integrated into the broader U.S. economy, including national monetary policy. Dallas is home to one of the Federal Reserve's 12 regional banks, and the Dallas Fed's president, Richard Fisher, is an active member of the Fed's policy-making committee.
        But, as Mr. Fisher often notes, the Texas economy has boomed in recent years while the U.S. economy as a whole has stumbled along. Perhaps inspired by the fact that Texas used to be an independent nation, two Dallas Fed economists recently speculated about what monetary policy would look like if Texas had its own central bank.
        Janet Koech and Mark Wynne, in the latest issue of the bank's Southwest Economy, looked at the Taylor rule, a calculation that determines an ideal level of interest rates based on several economic variables.
        The Fed has held its benchmark short-term rate near zero since December 2008 in a bid to bolster U.S. economic growth. But "a monetary policy calibrated to Texas' economic conditions would have called for an interest rate of zero for at most one year and rates of about 2 to 3 percent in 2011 and 2012," Ms. Koech and Mr. Wynne wrote in their article.
        That's because Texas experienced a shallower and shorter downturn than the economy at large, they wrote. Inflation isn't a driving factor, since Texan inflation "is broadly similar to inflation in the rest of the U.S.," they wrote. "This is largely because the state is fully integrated into the broader U.S. economy. Wage and price pressures are kept in check by the movement of goods and especially workers."
        Of course, the Taylor rule isn't binding for the Fed. Stanford University professor John Taylor, its author, thinks U.S. short-term rates should already be above 1%, but most Fed officials don't expect to begin raising rates until 2015.
        (END) Dow Jones Newswires

        June 03, 2014 11:01 ET (15:01 GMT)