 Hidden Learning Treasures is a production of cooperating school districts, bringing family and educational programming to your home and school. This program is made possible by a grant from the St. Louis County Cable Television Commission. Hey, it's Maya. Oh, hi, Maya. What's going on? They just called me at my mom's office. I got picked to be on this year's Fed Challenge team. Fed Challenge? What's that? It's a competition that gets high school students involved in the federal reserve system. It's all about how key monetary policy decisions are made and how they affect interest rates. As one of our past presidents put it, it's the economy's stupid. Hey, who are you calling stupid? Just kidding. Anyway, Ms. Smith is looking for some other students to be involved in this program. You're good at all that stuff. Why don't you give it a try? Good at what stuff? I can tell you everything I know about the Fed in two words, Allen Greenspan. Oh, come on. You know more than that, don't you? You know about money, right? Yeah, I know I never have enough of it. Tell me about it. Seriously, though, the Federal Reserve and Allen Greenspan do a lot of important stuff. Listen, Ms. Smith gave us some resources to get started. Why don't you take a look at this website? And if you're interested, you can come to our meeting on Thursday. Do you have a pen? Actually, I'm here in front of my computer. What's the address? Okay, it's www.federalreserveeducation.org. Once you get there, click on Fed 101. That'll tell you a lot of what you need to know. www.federalreserveeducation.org. That's right. And click on the Fed 101 link. This will take you to the home page where you see several links to navigate through the website. This looks pretty cool. See, what did I tell you? Just click on the link Fed 101 at a glance to get started. It'll take a minute or two to download, but believe me, it's worth the wait. All right, Maya. Tell you what. I'll surf through the Fed 101 site and then call you later about my decision to join the Fed Challenge Team. Fair enough. Sounds good. Talk to you later. All right, Maya. This better be good. You don't need to wade through thick textbooks to get a general understanding of the Federal Reserve. While it sounds like a complex government monster... Wow, it's talking to me. Cool. The Federal Reserve actually is independent from the government and operates in many ways like any other corporation. Interesting. I didn't know that. First, let's see how the Fed came to be. In 1913, Congress created the Fed to reform banking in the United States after many bank failures. Here, Woodrow Wilson signs the Federal Reserve Act into Law on December 23, 1913. That's the year my grandpa was born. That's a long time ago. In the history section of the Fed 101 site, you'll find out more about the banking panics that shook the nation before the Fed was created and the turmoil and triumphs that occurred after. Boy, I'm glad I didn't have a checking account back then. So here we are. You know how the Fed came to be. Now, let's figure out how the Federal Reserve system is structured. The system divides the nation into 12 Federal Reserve districts. The Board of Governors, headquartered in Washington, DC, supervises the system. Man, I didn't realize how elaborate the Fed was. Along with the Board and the Reserve Banks, there are other pieces to the puzzle. The puzzle begins to be completed with the FOMC. That's the Federal Open Market Committee, the body that sets monetary policy, or in simpler terms, impact short-term interest rates. I think that has something to do with that challenge. The puzzle comes together with the public, member banks, our nation's government, and other important pieces. You'll find out more about the pieces of the puzzle when you visit the structure section of the Fed 101 site. Also in this section, you'll visit the 12 Federal Reserve Bank presidents and find out what makes them tick. That sounds like a cool job. Now, you may be wondering, why is this important to me? Well, the thought did cross my mind. You hear a lot about short-term interest rates being associated with the Fed. As our nation's money manager, the Federal Reserve implements monetary policy. That is, it influences the flow of money and credit in the economy. Monetary policy? Yes, that was what Maya said Fed Challenge is all about. The Fed changes the money supply by increasing or decreasing reserves in the banking system through the buying and selling of securities. The changes in the money supply in turn affect short-term interest rates. So that's how it all works. When the Fed buys securities, the amount of excess reserves at banks rises and as a result, short-term interest rates fall. On the other hand, when the Fed sells securities, the amount of excess reserves at banks falls and as a result, short-term interest rates rise. Boy, and I thought it was a lot more complicated than that. You'll get a clearer picture of how the Federal Reserve conducts monetary policy or affects short-term interest rates in the monetary policy section of the Fed 101 site. This site is a great way to learn about the Fed and there's so much more. I gotta call Maya. Hello? Maya, it's Scott. You are right. This Fed 101 site takes the confusion out of learning about the Fed and it's in simple English. You didn't believe me, did you? I told you it was cool. I'm just getting to the part about monetary policy. Well, that's exactly what Fed Challenge is all about. So we'll see you at our meeting on Thursday, right? Count on it. I'd say Alan Greenspan should keep an eye on his job. I like to give him a run for his money. See you then, Alan. Mr. Greenspan should keep an eye on his job. Looks like he has some pretty tough competition in the wings. Speaking of competition, this brings us to the Fed Challenge section of our show, a multi-level national competition designed to bring real-world economics into the classroom. You may know a little more than Scott does about the Fed and the economy. Economics can be a little hard to understand at first and you may not know how the Federal Reserve really affects your life. That's why the Fed introduced the Fed Challenge competition in 1995. From the beginning, its primary goal has been to encourage students to learn about the role of the Federal Reserve system in the U.S. economy. And perhaps more importantly, the competition was designed to develop interest in economics, business, and finance for college-level study and subsequent career paths. What do you think the students get most out of Fed Challenge? What do they really come away with? The students that I have had in the past that have done Fed Challenge have really come away with an acute awareness of what the whole economic policy is. And one of the things I have to say is that I check back and of kids that have been on the teams in the past, I have nine of them now that are majoring in economics at college. So they're calling you still for advice or guidance maybe about... Oh no, it's more the other way around. Okay. Is it hard to select the team? What goes into that process? It's very hard to select the team. We're fortunate that we have a large public school and that large school means you have many students that are very talented and very capable performing. And so what we've had to do is we ask students that are interested in it to come to meetings before we select a team and then I give them a written test and then they also have to make an oral presentation. And I have judges pick from that to decide who will actually be on the team. So you undergo a competition even to get on the team? Well, I think that it really requires hard work on the part of the students. And so if students are willing to go ahead and do that to begin with, it shows their dedication and determination and that they probably will be good students and good candidates for the Fed Challenge team. Fed Challenge is held at participating Federal Reserve banks and branches throughout the country. In the 8th Federal Reserve District, five member teams from area high schools each take part in a 30-minute performance-based assessment at one of the three branches in Louisville, Little Rock and Memphis, or at the Federal Reserve Bank here in St. Louis. Each performance consists of two parts, a 15-minute presentation before a panel of three judges and a mock Federal Open Market Committee or FOMC forum followed by a 15-minute question and answer session. Scott learned on the Fed 101 website, the FOMC is the Fed's monetary policy-making body. The FOMC is responsible for formulation of a policy designed to promote stable prices and economic growth. In a word, the FOMC manages the nation's money supply. In the mock FOMC format, the five team members play the role of monetary policy makers on the FOMC. So what did you know about the FOMC before you came to the Fed Challenge? Well, before I participated in Fed Challenge, my knowledge of monetary policy and the FOMC operations was generally limited, but through participating through Fed Challenge I learned a lot about economics and monetary policy and a lot of the importance that the FOMC plays on economy and our current events. Was there anything that surprised you about the FOMC's role? Anything that you really were totally unaware of? I think I was surprised about how much fact the FOMC carries on monetary decisions in America and the strength of our economy. Well, when you were putting your presentation together, you had to consider a lot of things. How did you decide what to leave out? What was the process together when you put it together? Of course, it took a lot of time and we had to research a lot, but through looking at different academic indicators and keeping up with the current events and what was going on in news and how that affected monetary policy, we were able to decide what was important and what was essential to our presentation. Were there last-minute surprises in the news that all of a sudden you had to include and had to decide how to handle it? There was just some surprises, but generally it just brought in our outlook rather than making it difficult for us to present. It actually added an element of recency to our economic indicators and how they pertain to what was going on today. The mock FOMC presentations may include an up-to-the-minute analysis of economic and financial conditions, a forecast of economic, financial, and international conditions that are of critical importance in developing monetary policy, and a recommendation to increase, decrease, or leave unchanged the target for the federal fund rate. The Fed challenge teams also use PowerPoint presentations with charts and graphs to illustrate the relevant data that support their position. Now when you put your presentation together you had to use some technologies and you had to put in some content and leave some out. How did the process go for you? Well from the beginning our team was pretty much in agreement. We had a basic, we knew what we didn't want to do and what we didn't want to conclude. So it just was a matter of finding up-to-the-information as the time went on and I think we didn't really have a problem leaving stuff out. We just had a problem fitting in everything. I mean I guess that is, we tried to say as much as we could. There were a few things we had to cut, but. Sure. Do you have any arguments about the final decision? No, not really. We were pretty much in unison. We had all worked fairly separately on our own speeches and our own indicators, but then when we came together we found wow it really fits together well and just how we'd wanted. After the presentation a three-member panel of judges usually made up of federal reserve staff members, financial professionals, and educators will question each team about its analysis, forecast, recommendation, and the federal reserves role in developing and implementing monetary policy. Judges will score each team by using five criteria. Knowledge of the Federal Reserve's role in developing and implementing monetary policy, response to judges questions, quality of the presentation, quality of the research and analysis, and evidence of teamwork and cooperation. Tell me what it's like being a judge at a competition like this. Oh, it's actually exciting. It is so much fun to see high school students who are so enthusiastic and so knowledgeable about something as esoteric as the Federal Reserve system. And most high school students out there think that the Federal Reserve is some sort of military unit and it's nice to see the students who who really know what it is and how it works. What do you look for among other things when you're when you're judging a competition like this? Well the students are excellent presenters and so actually we don't have to worry about that. They're so well prepared that it's delightful to listen to them. But when the questioning time comes for the judging session we're looking to see if they really understood what they said and if there's some depth of understanding to the positions that they take within their presentation. So you might probe just a little bit for them? Prove yes, probe a lot. And the students are amazing in how they rise to the occasion and how they handle that task. Now that you have all of the background information on Fed Challenge as well as the rules and regulations let's get straight to the competition shall we? This year some of the teams from the St. Louis area include Parkway Central, Rockwood's Marquette High School and Clayton High School. First up Parkway Central. How much they have spent on those things they need as well as the extra money they have to buy things luxury goods such as cars or whatever. I feel like in terms of the graph. As you can see the durable goods has actually been pretty stable up until October of 2001 where you see a dramatic increase. Now the durable goods includes vehicle sales of lightweight vehicles and that could be due to the zero percent interest. It's a good economic indicator if you look at it very carefully. It is it will vary due to outside factors that affect it but if you look at it very carefully it can produce some useful information so it really will just change to the graph real quick. As you can see John mentioned there was an artificial spike in vehicle sales around October of this year. Zero percent financing zero percent interest. I'm sure you all heard the commercials. Well that is not any real indicator of how our economy was doing. If you look directly after that period it dropped to a level that was no lower than it was before the artificial spike which is an extremely good sign because it means even though there was a huge rush of people who went out to buy cars there's still enough people left in the current system who are willing to spend that money on the vehicle sales. They take into account the average money spent by a family in a month over a time period and withdrawn from that are the factors of food and energy prices which could be highly volatile subject to drought or in or trade wars etc. Federal funds right can somebody tell me what is the federal funds right who pays the federal funds right I guess that's my question. It's the price that it costs banks to borrow money from the Federal Reserve is at least how it was. And it's very important to watch it. How much growth is too much growth. Levels in unemployment depend are good or bad depending on different circumstances. For example during a period of economic growth declines in the unemployment rate generally means that those who are once looking for a job have found them. But in a period of extended depression a decrease in the unemployment rate can mean that people are so discouraged that they drop out of the labor force altogether. Is extremely low and inflation is extremely high and that's obviously is a dangerous sign and that the sector is actually heading towards a period of too fast growth. Okay I guess we've exhausted the time. Thank you very much. Thank you. Pretty impressive presentation wouldn't you say. I'm glad I wasn't fielding some of those questions. Let's see how Marquette does. Good morning everyone. Would someone like to open the meeting by making a motion to approve the minutes? So is there a second? Second. Without objection it is approved. We at the Federal Reserve have found it necessary to act swiftly and decisively to adjust the nation's monetary policy to accommodate the recent strains in our economy. Output has contracted while unemployment has been rising. That's for quite an action that will both economic recovery. What do we have in the communities today? Tawson would you like to begin our discussion? Well thank you Madam Chairwoman. It looks to me like our aggressive rate cuts are beginning to bear fruit. Our objections of liquidity into the market have boosted consumer spending and a recovery is underway. In fact as you can see on this graph there was only a single quarter of negative GDP growth during this recession. This downturn was mild and I'm concerned that recent economics. While the bleeding in labor market disease there is still significant weakness and risk of further job losses. Well I see signs that employment will recover soon. Historically the number of hours worked rises before employment does. Since employers are reluctant to hire and train new workers they first will increase the hours their current employees work. The three-month growth rate in hours has already turned positive. This pattern leads me to believe that we will see employment rise in the near few quarter is still deep. Both industrial production and propensity utilization have fallen for the past six months and at 74.2 percent CAPU is currently at its lowest rate since 1983. The slow rate has almost eliminated supply bindings resulting in very little inflation may lead to further weakness. While the world problems and investment the inventory and sales relationship has stabilized at 1.39 which is good news for all parts of the economy. This means that businesses at all points of supply chain are prepared to quickly react to any changes in demand. Some people argue that the recession should be measured primarily as a decline two quarter decline in GDP. Some other people now argue that it should be measured by unemployment. If unemployment rises beyond some x point then we should declare recession. Well official recessions are declared by the National Bureau of Economic Analysis and that we were in official recession. Personally I don't agree that we are in a question because we did in fact only have a negative quarter to be growth followed by a positive quarter and so I don't think we're truly in a recession and in fact Mr. Bill Full has done this. All right Clayton looks like you've got two tough acts to follow. We didn't really know whether it was actually turning around or not and so the question we have to ask ourselves is have we met the economic turnaround targets that we were looking at from the last meeting and I think the goal of this meeting is to take a look at what we want to do first to set the targeting federal funds rate and how you might want to affect that and second to look at targets that we might be looking for for the next meeting. So what projections do we have and what we have to be considered when assessing last year's economic performance. I think that the growth growth domestic product is one indicator that may show that the economy is actually one recovering fashion we thought and two that we should keep the target rates as they are. For the 12 month period that ended in January 2002 the CPI the first virus since August. The inventory sales ratio has been falling also showing that goods are quickly leaving shelves. All of this points to growing consumer confidence and gives businesses a more optimistic outlook. Contrary to this data however is corporate profit. Businesses are laying people off and have less total profit as you can see in the graph. Therefore companies cannot afford to spend much on extra goods in capital. Until profit begins to pick up again and companies regain their losses from 2001 investment is contributing to a lack of overall growth and the short run investment numbers look bleak. However in the long term I don't think it needs to be addressed now but certainly in the next six weeks. Oh I must make similar conclusions to Chairman Young's comments on consumer confidence. Consumer confidence has risen all geographic areas in the United States bringing the national average to 97.3 in January 2002 as compared to the base value of $195. Now when we sit at this table last year there were great words about why that consumer confidence could pull us about our recession and but figures such as these may conclude that consumers are optimistic and that they're ready to consume and take the role once again. The grocery industry declares that it has stayed constant throughout the short recession and believes that their business will continue steady as always. Clothing took a small hit this one or due to the mild temperatures but they are very optimistic about their business's future. What we find is that there's a 4% difference between the consumer prices excluding housing and including housing and that's a strong inflationary pressure and I'm going to and I'm concerned about whether or not the federal reserve should consider raising its party to federal funds rate to quell spending on real estate. Another concern that I have is the Bush administration's response to the trade deficit which was which is the passive tariff. We think that the the passage of the tariff was. We all seem to be sort of happy pleased that the inflation rate is very low at the present time and you're saying that for that reason we should not change the federal fund rate. Do you think that the monetary policy operates instantaneously? Yeah obviously the implied answer there is no. And that is a concern however if we take a look at the actual inflationary numbers and we take a look at those time bombs well we have to take a look at that economy and we have to understand that we're recovering and we're on the upturn and we don't want to cut that off prematurely and that's why I think the next meeting in six weeks would be the perfect time to take a look at inflationary pressures and if we find that is a significant problem which I do I think we should act to quell that. Another thing is you have mentioned the stimulus thing that you mentioned earlier. Well it looks like the judges have a pretty tough decision on their hands who would you pick? Whatever the outcome all of these teams have had a winning experience today and to show its appreciation the bank will award a certificate to every student who participated. The winning and runner-up teams receive trophies. Next the first place team will move on to district competitions where they'll compete against area winners from Little Rock, Louisville and Memphis. Then the winner of the district competition will receive an all expense paid trip to Washington D.C. for the Inter-District Fed Challenge Finals. Congratulations to everyone who took part in the Federal Reserve's Fed Challenge. Learning Treasures is a production of cooperating school districts bringing family and educational programming to your home and school. This program is made possible by a grant from the St. Louis County Cable Television Commission.