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Research: Responding to the Crisis

Given the financial crisis and the Federal Reserve's policy innovations in response to it, it is not surprising that, in 2008, demands on the Philadelphia Fed's Research Department for policy and economic analyses increased.

FOMC MeetingsIn addition to the usual eight meetings of the Federal Open Market Committee (FOMC), there were six unscheduled FOMC meetings as well as several unscheduled meetings of the Bank's board of directors.

The Bank's president and directors benefited from the Research Department's strong analyses of economic developments and policy issues through regular and special briefings. Topics included monetary policy at the zero bound of interest rates, interest rate spreads, the design and economic effect of the Fed's special liquidity facilities, financial regulatory reform, the TARP (Troubled Asset Relief Program), and the department's new economic forecasting model. As Director of Research Loretta Mester observed, "Policy is much more complicated in this economic environment."

The Research economists also contributed to President Charles Plosser's 11 major speeches last year, most of which addressed some aspect of the financial crisis. Topics included the limits of central banking, financial regulatory reform, and monetary policy and financial stability. Furthermore, Research staff helped Public Affairs prepare the president for interviews and questions from the media. All of these activities took on added importance because President Plosser was a voting member of the FOMC in 2008 and also because the stressed economic environment raised the public's level of interest in economic developments and what policymakers had to say about the economy. Indeed, the information specialists in the Research library worked hard to keep the public and Bank employees apprised of economic conditions. Library staff fielded an increased number of requests for information from the public and from Bank staff seeking data for studies, briefings, and presentations.

Last year, the Federal Reserve Bank of Philadelphia and its Research Department contributed to the debate on regulatory reform. Research staff organized a meeting of members of the Federal Reserve System's working group on new financial architecture with prominent banking scholars from academia to discuss proposals for regulatory reform of the financial system. This "summit meeting" was held at the Philadelphia Fed in January 2009.

The additional workload imposed by the severe economic downturn cut across all three sections of the department: regional, macroeconomics, and banking. However, the sections also maintained their normal workload, and some of that output focused on the turmoil in financial markets.

For example, the regional section compiles and publishes the monthly Business Outlook Survey, which polls Third District manufacturers, and the quarterly South Jersey Business Survey, which is sent to members of the Chamber of Commerce of Southern New Jersey. In 2008, both of these surveys kept market participants, Third District businesses, and Fed policymakers abreast of what was happening in the regional economy. In fact, the Business Outlook Survey has been shown to be a good predictor of national economic conditions, so it garnered even more attention than usual in 2008. The regional section also collected specific information about how the financial crisis was affecting local businesses. For example, both surveys included special questions that asked local business leaders about problems in obtaining credit and how those problems had affected production or inventories at their firms.

The Survey of Professional Forecasters (SPF), conducted by the Research Department's Real-Time Data Research Center, gauged what forecasters were projecting for inflation, output, and other economic variables, as it usually does. But like the regional surveys, the SPF asked special questions related to the crisis. For instance, the SPF forecasters were unanimous in saying that the U.S. economy had entered or would soon enter a period of recession before it was declared by the National Bureau of Economic Research. The SPF also asked forecasters for their views on how a fiscal stimulus package would affect their estimates for gross domestic product in 2008, 2009, and 2010. The semi-annual Livingston Survey continued to collect forecasters' projections for short-term and long-term economic growth and their predictions for the movement of inflation, interest rates, and stock prices, providing valuable data on expectations about the economy.

In addition to its monetary policy work, the macroeconomics section continued its development of a new economic forecasting model that will be used to prepare the Bank's quarterly forecasts. This model has already proved useful in an environment where economic forecasting is incredibly difficult. In addition, the macro section prepared a briefing on the theoretical and empirical research on the effects of financial shocks on the economy.

The banking section also pitched in with the department's efforts. In addition to ongoing work on regulatory reform, banking staff published an issue of the quarterly Banking Legislation and Policy that provided information on a range of crisis-related topics, including responses to the liquidity crises at financial institutions, the government takeover of Fannie Mae and Freddie Mac, the lending facility that the Fed created for AIG, and the Fed's widening of collateral accepted for loans to banks. The quarterly Banking Brief kept market participants and the public up to date about conditions at banks in the Third District and nationwide.

Over the course of 2008, other output from the department reflected the economists' interest in the financial crisis and their attempts to analyze it. For example, Business Review articles touched on such topics as liquidity crises, the effects of bankruptcy on homeownership, and the "fresh start" provisions of the bankruptcy law. The department's Working Paper series produced studies in such areas as monetary policy, forecasting models, core measures of inflation as predictors of total inflation, the effects of monetary tightening on local banks, and central bank structure and effective central banking. In addition, department staff produced several special reports that discussed such topics as the use of real-time data to date recessions and conditions in the housing market in the Third District. Staff members also made an unusually large number of speeches, chiefly devoted to outlooks on the local economy.

In sum, besides its usual annual workload, the Research Department shouldered additional responsibilities occasioned by an unprecedented financial crisis and economic downturn. In meeting these responsibilities, not only did the department help keep Bank staff, directors, and interested parties in the Third District informed and up to date, its work also sought to lay the groundwork for improved policymaking in the future.