Oberlin College News & Features

ON THE SPOT
From Analyst to Professor—Macroeconomist Trades Federal Reserve for Oberlin
By Charu Gupta / photos by Emily Miraldi '06
June 17, 2004
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With a PhD in economics from Harvard University, Kenneth Kuttner spent several years analyzing the impact monetary policies have on financial markets and teaching graduate courses at Columbia University's School of Business. He then decided to answer a new calling: the undergraduate classroom.

Excited by the smaller class sizes and opportunity to know his students by name, Kuttner moved to Oberlin last fall with his wife, Laura Bentz, a freelance childbirth educator, and their daughter and son, ages 3 and 8. He was hired with tenure and in January began teaching a seminar and course in his area of expertise—macroeconomics.

"The fun part of teaching is talking to the students, working with them, seeing individually how they are using the material," he says. "That's not something you can do at a big school."

Bringing in the world

"Being involved in [the banking] world gives you a much greater appreciation of the complexity of that world," Kuttner says. "Policy choices always involve some kind of trade-off or dilemma. Ultimately, choices come down to a judgment call by the policy maker, we hope based on sound analysis."

Kuttner started his career as an undergraduate at UC-Berkeley. The time, from 1978 to 1982, was tumultuous for U.S. monetary policy. Inflation rose rapidly to more than 14 percent and interest rates hit nearly 20 percent. Although it was the most severe recession to hit the country since the 1930s, Kuttner says it was a fascinating time for someone entering the world of economics.

After earning his PhD, Kuttner went to work for the Federal Reserve Bank of Chicago—one of the main fiscal bodies responsible for setting macromonetary policy. He stayed there seven years, then went on to the research division of the Federal Reserve Bank of New York. There, he navigated a labyrinth of macroeconomics and monetary policy while working with economists at the International Monetary Fund, the World Bank, and the central banks of many countries.

Second-guessing economists is easy, Kuttner admits. But what's more difficult is realizing the nuances behind their decisions. Among his aims is helping students understand the trade-offs, balancing acts, and intellectual arguments on both sides of every policy decision.

That's why Tobias Smith, an economics minor, says he loves Kuttner's macroeconomics class.

"It's easy as a liberal to disparage economists without knowing how things work," says Smith, a self-described liberal. He says that Kuttner, who often assigns the reading of in-depth New York Times articles, has an awareness of students' concerns and current events that he translates directly into the curriculum.

"He's a clear teacher who encourages students to work hard, and he gives feedback," Smith says.

Life as an economist

While at the Federal Reserve Bank of New York, one of Kuttner's favorite projects was a deflation analysis he helped conduct last summer. With inflation falling and economic recovery sluggish, there was growing concern about the possibility of deflation in the U.S.—a problem for central banks like the Fed in charge of raising and lowering interest rates to stimulate the economy. But with interest rates already low, deflation could force a zero percent interest rate and leave the Fed with nowhere to turn.

Kuttner examined a number of policy options that could prevent deflation. One element of the study looked at Japan, which has experienced mild but persistent deflation in recent years.

Kuttner concluded that the absence of a clear policy to counter the deflation led people and markets in Japan to act as though prices would continue to fall. So public commitments to anti-deflation policies were key, Kuttner advised.

"The deflation study was fascinating," Kuttner says. "Intellectually, it was the most interesting policy analysis to come up since the 1980s, even though it didn't turn out to be nearly as dramatic."

The research was submitted to the Federal Open Market Committee, a policy-making body inside the Federal Reserve that sets interest rates. Alan Greenspan chairs this committee. Because deflation can wreak havoc with the economy and because much of the Fed's research influences market behavior, large parts of Kuttner's work remain classified to this day.