Sunday, November 09, 2008

Notes from the Fed Conference

I learned a good bit at the conference and had a great time. The St. Louis Fed has a beautiful new conference facility. It's like walking into a palace. And not a dime from taxpayers, the Fed independently funds itself (they make the money, duh).

The auditorium was like the United Nations' auditorium. Plush chairs, great technology. They gave everyone (60+ people) a laptop to play with for one demonstration.
Very nice meals provided and an open bar. I abstained and kept the professors from other Baptist schools accountable (much to their chagrin, I imagine).

It was great to meet other eco/finance professors like myself and hear their words of encouragement about how the first semester of teaching is always the worst. I learned about other college's curriculum and what other instructors were finding effective in the classroom. The Fed is constantly putting out curriculum, games, study helps, etc. for students so that was great to learn about.

The first day of the conference was mostly spent listening to officials talk about the current financial crisis and the Fed's response. Since I spend hours a day reading the latest articles and economist blog discussions, I was very up to speed. I could tell the forecaster who presented reads the same blogs that I do. Nice. Myself and a couple other nerds asked some questions to try and glean information we're not going to see published in the newspaper. I didn't get to ask as many as I'd have liked, of course, but I enjoyed every minute of the discussions.

Here are a few notes I made that I think are most important:
Kevin Kliesen, Associate Economist in the Research Division. Forecaster.
Long term:
Real GDP growth rate will begin a steady 25-year decline starting in 7-8 years when baby boomers begin to retire.
Short term:
CPI expected to be at 3-4% annual growth in 4th quarter of '08.
TIPS rate not a good indicator of inflation, other than Nouriel Roubini no one is predicting deflation.
200,000 jobs expected to be lost in October.
Fed is concerned about volatility in the stock market. "Incredible; startling."
Fed is concerned about volatility in investment driven by uncertainty and adverse selection problems.
Credit crunch: "Lending is not contracting. Certain parts of the credit market are frozen [commercial paper]."
Bank lending is going way up, but CP way down. Banks becoming more important part of external fund sourcing for firms.
36% increase in the Monetary Base in the last year. "No historical precedent."

Consensus forecast:
Short, shallow recession (with increasing probablity of a long, protracted recession).
Indicators point to severity (citing OECD paper from August '08)
Risks:
1. Equity prices falling more (maybe housing recovers by end of '09?)
2. A lot more money is in the pipeline now... how will the Fed contract it?
3. FY 2009 deficit: $1 trillion. Can we sell T-bills at the same interest rate?

Another economist presented the history of the housing bubble and its aftermath. Not much new there.

Q&A session:
Fed is engaging in quantitative easing. So much liquidity in the market that it's hard for them to hit their Fed Funds target rate.
Great concern over the Fed's "exit strategy." How do you contract the money supply now without a major recession?

James Bullard, the new St. Louis Fed President, spoke at a dinner the first evening. He expressed his concern for the loss of independence for the Fed as it's now being "blurred" with Treasury in the minds of many Americans. He disliked the bank recapitalization scheme and liked the TARP plan. He wanted to the government to be as hands-off as possible and let it run its course. He saw the look on Ben Bernanke's face when he was told AIG was in trouble and "it wasn't pretty." He said it was crucial that Obama assemble his economics team ASAP and that the transition be "seamless." Regulatory reform isn't sensible right now, wait until clearer heads prevail. We won't know the crisis is over until it's over.

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