Federal reserve challenge script


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Federal reserve challenge script

  1. 1. Kunal: Alright everybody, lets get started. Looking briefly at the fourth quarter Real GDP, the 5.6 % rise after the 2.2% third quarter increase showed a positive trend in economic returns. The acceleration had to do with the slowdown in the rate at which business drew down inventories. Businesses saw less of a need to deplete inventory as sales proved to be more promising than past economic quarters. Would you begin talking about the effects of fourth quarter GDP Governor Shafi?<br />Shamil: I would be happy to. The increase in the fourth quarter real GDP was primarily due to the acceleration of exports, private inventory investments, and Personal Consumer Expenditures (PCE). The 3.5% rebound in real GDP from third quarter to fourth quarter was caused by business investment in software and technology and obvious net export increases. The economy saw muted consumer spending in the real estate and automotive industries that potentially could have increased the fourth quarter real GDP by much more than its current shift.<br />Shane: One of the major factors influencing the GDP is trade deficits. The United States international deficits in goods and services increased to about $39.7 million from $37 million in February. This mainly resulted in a national increase of imports from to $182.9 billion from $179.8 billion. For goods, the deficit was $51.3 billion from $49.4 billion, and for services, the increase was approximately, $33.1 billion from $32.0 billion. This increase was primarily due to the increase in demand of consumer goods. A high percentage of the increase in trade deficits came from the automotive industry. The demand for vehicles grew causing the amount of imports to increase. The United States experienced a decrease in exports of food and beverages. This is mainly because of the regulations and population. The service industry also increased because of the more knowledgeable utilization of technology. All of these are major factors of why the trade deficits and foreign investments in the United States increased. <br />Keenan: Furthermore, The decrease in money supply, including savings, other time deposits, and the cash and checkable deposits counted in currency, is unusual as the federal government’s certain stimulating actions caused the money supply in the economy to increase. Typically, though there is some deflation after the worst of an economic downturn because lower demand starts to bring down prices the prices of nearly anything except for commodities which are becoming more and more unpredictable, are still enjoying resurgence. Healthy inflation of the economy should occur in the future.<br />Kunal: Governor Shafi, you mentioned that the nation’s exports increased primarily due to an increased demand for consumer goods. Will you be kind enough to provide more incite as to the current consumer market and the consumer price index (CPI)?<br />Shane: I would be glad to. The CPI for all urban consumers (CPI-U) over the past 12 months ended up having a 2.3% increase with a .1% change during March 2010. This change is partly due to the increase in the fresh foods and vegetables index, which increased 4.6% in March, contributing for over 60% of the total item increase. The total price indexes for all items less food and energy remained stagnant in March. Specifically looking at the energy index, this unchanged state was due to the declines in the indexes of gasoline and natural gas, which were barely effaced by the prosperity of the electricity index. Looking at other sectors of the CPI, we can see that the indexes for vehicles and medical care increased. On the contrary, the indexes for household furnishing, shelter, and apparel presented an overall decline. Nonetheless, the overall increase in the CPI indicates a positive future in regards to the fragile economic situation that America is experiencing. <br />Kunal: Thank you for the detailed analysis Governor Shafi. A prime contributor to the outcome of the CPI is housing. Since March, privately owned housing starts seemed to be more on an incline as they were reported at a seasonal adjusted annual rate of about 626,000. The inclination was about 1.6% above the previously announced February rate of 616,000 and about 20.2% above the March 2009 rate of 521,000. The significant rise in housing starts from March 2009 was due to the increase in overall housing production, an estimated two million homes being built annually. The stimulated growth in housing production rates was most likely spurred by federal tax credits for homebuyers issued by the government.<br />Shamil: On the other hand, single-family housing starts, reported at a rate of 531,000, actually declined 0.9% since the revised February figure of about 563,000. The decrease in these statistics shows a mere indication that home builders are failing to see dramatic recovery on demand. The addition and increase in sales of a multitude of foreclosure housing has lead to increased demand and higher competition between builders. Single-family residents find it more affordable to acquire foreclosed properties than to spend much more in establishing residential building projects. We feel that the decrease in foreclosed property is in the near future and will most likely lead towards the inclination of residential building projects.<br />Kunal: As the CPI displays only mild changes over the course of this year, consumer spending has increased for the fifth straight month and industrial development is starting to show signs of stabilization. Retail sales have not only remained positive in March, but they have continued rebounding, increasing 1.6%. The economy, driven by continued consumer spending growth, has remained on its path of recovery and stabilization. <br />Keenan: In addition to increased prosperity in the consumer market, lightweight vehicle sales have been increasing due to a mass of financial incentives from companies and an increase in terms of quality and efficiency of automobiles in the market. While lightweight vehicles are a small part of the economy, their sales predict very accurately a rise in GDP. We cannot however assume the economy is getting better in the long run solely by looking at lightweight vehicle sales because, like GDP fluctuation, they more precisely reflect short term trends as a leading indicator.<br />Kunal: Thank you for the information Governor Kassar. The positive outlook in terms of consumer spending translates to the levels of industrial production. Following a sharp decline in early 2009, industrialization productions continue to rebound. The rapid 1 point growth increase that was seen in the 3rd quarter of 2009 however slowed in the year’s last quarter as growth averaged slightly over half a point. In March of 2010 this decelerated growth is further seen as the level of industrialization increased by only .1 to 101.61. While the total industrial output increased 7.8% in the first quarter of 2010 compared with last year’s first quarter, in March it only increased at a mere .1% over the previous month. The development and production of information processing systems and other equipment greatly contributed to the quarter’s gains. While manufacturing outputs rose .9% in March due to success of companies specializing in durable goods, Utilities outputs dropped 6.4% as demand for heating decreased due to unusually high temperature levels of the month. Petroleum and Coal based products had an increase of 3% in the month of March, while rubbers and plastic products experienced similar outcomes, increasing 1.7%.Also, oil prices have seen a significant increase that potentially could dampen economic growth as well as manufacturing and industrial production. <br />Keenan: The increasing prosperity of industry can also be seen through the current capacity utilization index. As of March 2010, capacity utilization is about 0.2 percentage points to 73.2%, being about 3.7% greater than that of 2009. Aware of the fact that this is below the average amount of percentage point from 1972 to 2009, the harsh February winter storms had a great deal of involvement in the utilization of factories and mines. The rise in March; however was due to the fact that the increase in weather temperatures brought less of demand for heating in production centers, which further allowed increased use and output of utilities. <br />Shamil: While I am pleased to hear that the consumer market and general industry are making an adequate rebound, the current unemployment rate in the United States is still quite high at 9.7 percent and remains a concern. From March 2009 to March 2010, the unemployment rate increased by 1.1%. The unemployment rate has risen constantly for the last three years. One reason the unemployment rate increased this quarter was primarily because of the unusual weather activity experienced in large parts of the country. This impacted a wide variety of the major business districts such as Washington, and Philadelphia. This seasonal condition caused the hiring of employees to decrease during that period of time which in turn caused the unemployment rate to gradually increase. Another reason the unemployment rate has remained somewhat stagnant over the past 4 months isdue to the hiring of 2010 Census employees. A large amount of employees were hired by the United States Census Bureau to conduct temporary searches. Employment by the Census Bureau will remain limited and offer only a temporary restraint on unemployment numbers.<br />Kunal: I understand your concern Governor Shafi. With a current unemployment rate of about 9.7%, the duration of unemployment seems to be a major issue in the rebound of these rates. As of the most current released statistics, March 2009, about 17.8% of those without jobs are unemployed for less than 5 weeks while 21.7% are unemployed for 5-14 weeks. The vast majority of those unemployed, about 60.5%, are unemployed for more than 15 weeks. A majority of these issues had much to do with increased job cuts, especially in the finance portion of the labor force. <br />Shane: In March of 2010, the nonfarm payroll employment increased by 162,000 jobs. This slightly affected the employment rate by increasing the number of jobs available. The average work hours for employees on private nonfarm payrolls went up by 0.l hours to 34.0 hours. However, the average hourly earnings for employees on private nonfarm payrolls decreased by 2 cents (0.1%) to $22.47. Although the nonfarm payroll employment increased in March, they still remained below the 180,000 jobs that were predicted by the consensus As of March, the unemployment rate remained constant at 9.7% which did not have an effect on nonfarm payroll. <br />Keenan: As this unemployment rate did not rise, the slight growth of large corporations contributed to the increase in the amount of jobs that are present in the economy. Even though the unemployment level is still a major concern in the economy, other indicators are displaying promise. The S&P 500 has been steadily rising since a significant correction in February. Over the past couple weeks, though, the index has showed promising stabilization with slower paced growth. Corporate activity is greatly influencing the S&P 500 in the current state. Earlier this week there were some worries about the state of the financial sector with the government letting go of some of its stake in the big banks and some investigations over suspicious deals at the worst of the recession. That caused the first notable decrease in the last couple of months. There is a rebound from that now and the S&P 500 is heading back towards the 52 week high. There has also been a significant increase in the amount of acquisitions and mergers recently and great performance among non-financial blue chip stocks. The current corporate earnings season has reflected the general bounce in GDP, including a stabilization of most of the financial sector. So what does this mean for the market as a whole? The current market trends tend to indicate continued positive market reactions to corporate earnings. <br />Shane: As Governor Kassar mentioned, the economy is expressing signs of stimulation. The Dow Jones has crossed 11,000 points and it is currently stagnant, increasing slightly. Consumers are also currently spending more and I believe that the current state is full of economic opportunity. I think that the Federal Reserve should decrease the current interest rates to 0% in order to further promote and build upon the economic progress that is occurring by allowing for a greater money supply and a quicker rebound.<br />Shamil: While I understand your point of view Governor Shafi, I would have to respectfully disagree as I think that your plan of action may impose the wrong impression upon the market. While consumer spending, which seemed to be a rarity in the distant past, is showing promising signs, I think that a decrease in interest rates may overly-promote the action, leading to a variety of debts that were the fundamental cause for the economic recession that the nation recently experienced. I believe that the best method to approach the repairing economy is a gradual rebound with a solid foundation. I would therefore advise the Federal Reserve to maintain the current interest rate at .25%. This will help to ensure economic stability while implementing adequate and stable future growth.<br />Kunal: Well stated Governor Shafi. Now that we have addressed some of the main aspects of the economy, we will be delving into voting procedure. As I concur with the fed’s decision on setting the federal funds rate at 0.25% over the next quarter, I urge an increase thereafter of half a point to .5% in order to prevent inflation associated with measured consumer spending. What are your opinions Governor Shafi?<br />Shane: Well, seeing that there has been a slight rebound in the economy and that economic recovery is prospering; I feel that it would prudent to keep the federal funds rate at 0.25% for about a quarter to allow for the stabilization of growth. Once we have seen signs of stabilized recovery I feel that the federal funds rate should be pushed up to 0.5% as a security measure to prevent inflation.<br />Kunal: Governor Kassar?<br />Keenan: Due to the fact that economy is constantly stabilizing, I feel that setting the federal funds rate at 0.25% was a discreet decision made by the Federal Reserve. This is precisely why I propose that we leave the federal funds rate at 0.25% for about a quarter. Seeing any stronger signs of economic recovery in the future, I suggest that the Federal Reserve increase the federal funds rate to 0.5%.<br />Kunal: Governor Shafi?<br />Shamil: As shown through statistics, I strongly believe that economic activity is currently rebounding heading towards recovery. This is why I feel that the astute proposals of everyone have direct ties with the economic recuperation, witnessed through the statistical data provided throughout the presentation. I vote to keep the federal funds rate at 0.25%, for just a quarter and then potentially increase it to 0.5% as a way to reduce the risk of inflation through increased consumer spending. <br />Kunal: Thank you Governor Shafi, it has been made clear by the committee that we should keep our lens focused on potential risks on inflationby increased consumer spending. We therefore have made a unanimous decision to keep the federal funds rate at 0.25% for a quarter. Directly after this period, the committee has voted to increase the federal funds rate to 0.5%. We have reached the conclusion of the meeting. On another note, I hope everyone has a great lunch.<br />