Federal Reserve staff rip up script as officials go dark ahead of meeting

[NEW YORK] Federal Reserve officials are entering a two-week quiet period during which their staff will prepare them for their upcoming policy meeting. This time around, the routine will be a little different than usual.

Research directors at the Fed's 12 regional banks are tailoring the agenda to match the circumstances ahead of the April 28-29 gathering. Normally, preparations for the policy-setting Federal Open Market Committee, which convenes every six weeks, involve a series of briefings on the economic outlook and policy options, anchored by widely-tracked statistics and popular models.

But as unemployment soars amid the coronavirus pandemic and the Fed launches emergency lending facilities, staffers are emphasising what they're hearing in conversations with local leaders and public-health experts, and seeing in alternative sources of data as they try to grasp potential downside risks to the economy.

"Normally, we run through a set of forecasting models that would give us some baseline for thinking about the trajectory of the economy and how monetary policy fits into it," said David Altig, director of research at the Atlanta Fed. "That is not a very useful exercise right at the moment, for sure."

A blackout on public remarks by Fed officials starts at midnight on Friday.

The research directors play an important role in Fed policy making. Collectively, they oversee hundreds of economists across the Fed system whose work ultimately flows up to the 12 reserve bank presidents. The principals then go into FOMC meetings - where they form a rotating panel of voters on interest-rate decisions - armed with the analysis prepared for them.

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As the top-ranking economists at their respective reserve banks, they're part of a small inner circle of staff that attends the closely-guarded meetings with their bosses. And many of them ultimately go on to become FOMC participants themselves. The presidents of the New York, Chicago, Cleveland and San Francisco Fed banks once led research divisions.

RETURN TO SCHEDULE

The April 28-29 policy meeting will be the first scheduled FOMC gathering since January. On March 3, as the virus spread, the committee hastily assembled via teleconference to authorise a half-per cent rate cut. It was an attempt to contain the ongoing meltdown in financial markets - the first such emergency inter-meeting move since the 2008 crisis.

Less than two weeks later, just days ahead of the next meeting on the calendar, they made a surprise Sunday evening announcement that they would cut rates again - to nearly zero - and begin rolling out emergency lending facilities designed to backstop markets. The previously-planned meeting was cancelled.

Now, as they get back on schedule, staffers are having to do things differently.

At the Atlanta Fed, they're incorporating information gathered from frequent conversations with local leaders, including those running nonprofits that serve individuals who now face increased hardships as a result of the crisis.

In Minneapolis, they're leaning more on alternative data sources like credit-card transactions and Google searches about unemployment benefits to get a sense of the scale of the decline in economic activity, said Mark Wright, the Minneapolis Fed's director of research.

LONG ROAD BACK

They're also now in close contact with public-health experts, trying to assess the likelihood of rolling shutdowns and re-openings of the economy as the outbreak recedes and flares back up again. That's something Minneapolis Fed President Neel Kashkari has warned could go on for another 18 months.

"We spend a lot of time on that, and a lot of our war-gaming is thinking about various scenarios for what might happen and how we might want to respond," Mr Wright said. "We're getting some very different opinions from different epidemiologists about what is likely and what is possible."

The path of the virus is top of mind. But assessing the efficacy and pitfalls of the government's response - the rollout of emergency loans and grants to small businesses and expansion of unemployment benefits have so far been slow, and plagued with implementation issues - is also high on the agenda.

At the Richmond Fed, a lot of the focus within the research department has been on using a regional outreach group to gather intel on those bottlenecks from local contacts, said Kartik Athreya, the bank's research director.

LAST-MILE ISSUES

"We've seen some 'last-mile' issues, and that's an unfortunate thing," Mr Athreya said. "We have to take seriously these implementation challenges because time is of the essence. If all of those individuals had time to wait, this in some sense wouldn't be a problem."

The San Francisco Fed has put its health-sector economist to work as the bank tries to understand the various possible ways in which the coronavirus may evolve, said Sylvain Leduc, the director of economic research.

"At first when we hired him we didn't think we would use his particular type of work that much," Mr Leduc said. "But the health-care sector in general has been very important, let alone what's happening right now. You never know when you're going to need that kind of expertise."

The San Francisco Fed's district includes the tech hubs of Silicon Valley and Seattle. It's used its knowledge of financial technology to advise its colleagues at the New York Fed and the Board of Governors in Washington on a forthcoming Main Street Lending Program in particular. The businesses that will be eligible for that programme are the ones from which Mr Leduc has heard the most bleak accounts.

"The situation is really dire," Mr Leduc said. "A lot of small businesses don't have much as much of a buffer to cope with the crisis."

BLOOMBERG