PARTICIPANTS

Kevin Warsh (FRB), John Williams (SF Fed), George Shultz, John Taylor, Michael Boskin, John Cogan, John Raisian, John Gunn, John Shoven, John Ciorciari, and Matthew Gunn.

KEY ISSUES DISCUSSED

• Recent Turmoil in Financial Markets – Gov. Kevin Warsh opened with a presentation on policy responses to the recent turmoil in financial markets. He argued that while many officials in Washington are focused on housing markets, the broader problem relates to financial institutions and markets. He discussed various factors that contributed to the current turmoil, including market miscalculations about the sustainability of high liquidity, inadequate credit assessments by rating agencies and financial firms, and the slump in housing prices. Warsh identified two key challenges now facing the U.S. economy: first, how will small business get access to credit in an environment in which most lenders are tightening credit? Second, how will financial institutions repair their balance sheets and identify strategies to generate profits going forward? He argued that resolving these two issues swiftly and soundly will be critical to reviving U.S. growth.

• Policy Responses – Warsh also discussed policy responses to the recent problems in housing and financial markets. He discussed the possible effects of the housing stimulus package and some risks associated with the expansion of GSE activities in housing markets. He also touched on new proposals for regulating financial markets. In both areas, Warsh stressed the importance of adopting policies that promote efficient markets and growth in the medium and long terms. He also analyzed the role of the Federal Reserve in light of recent events. He noted that the Fed has a high threshold for interventions like the aid package to Bear Stearns and emphasized the importance of a sound, credible Fed policy going forward.

• Inflation and the Dollar – During the group discussion, participants also questioned Warsh about inflation and the strength of the dollar. He argued that much of the recent inflationary pressure comes from global trends in labor and capital supply and noted that the Fed is watching inflation trends carefully and taking appropriate steps. He also analyzed the different recent approaches taken by the ECB and the Fed toward inflation and interest rates and discussed some possible trends going forward.