Meet the kids challenging the Fed

The actions of consumers and investors impact economies, given their spending, debt and employment levels impact growth. For this reason, early financial literacy should be a priority.

Read: Help parents teach kids about money

“It’s key to understand how our actions affect the economy and what we can do to prevent recessions like the one [I] grew up in,” says Rebecca Martino. Further, “Even though economic downturns happen, [governments] can prescribe solutions to help fix the economy.”

You may think Martino is an economist or banker. But she’s a high school senior, who was a member of New Jersey-based Sussex County Technical School’s first High School Fed Challenge team. Her team won the Maiden Lane division of this year’s Fed Challenge, beating out dozens of other student teams.

The Fed challenge takes place annually, at both the high school and college levels. It’s run by the Federal Reserve Bank of New York and students get a chance to showcase their monetary policy knowledge in front of Fed leaders. Based on their knowledge levels, they’re either tasked with researching and presenting case studies, or assessing the current economy and the Fed’s actions.

Read: Fed wants workers to get paid more

Martino competed alongside Annika Dugan, Joseph Mitchell and Keith Rupp, who are also seniors, and junior competitor Justin Cherena. The students had taken financial literacy courses—a graduation requirement in New York—but their main areas of study range from engineering and business to cosmetology.

The team was led by Will Anderson, a financial literacy educator at the school. But his students came up with the idea of competing, he says.

Read: Boost clients’ financial literacy with this resource

Mitchell, who opened his first bank account at age six, says, “Very few teachers can make finance a fun concept, but [Anderson taught us] about what the Fed does, how the central banking system works and how important its work is.”

Here’s a breakdown of how the Sussex Country Technical team tackled the 2016 competition, and a look at what set them apart.

The team’s monetary policy recommendations

The Sussex County Technical team first had to complete the New York Fed’s pre-competition series of workshops. They also spent 100 hours tackling two case studies assigned by the Federal Reserve Bank of New York; the first proposed the economy was coming out of a recession, the other proposed the economy was growing too quickly. For both cases, the team had to recommend how the Fed should support the economy.

“We had a month to prepare for the first case study presentation and Q&A,” says Anderson. “The case had to do with oil prices, which were the challenging variable putting the economy at risk. So we looked at how oil prices and different variations in these prices could lead to potential shocks.”

The case stated that the economy had been in recession for two quarters. “But even though the economy was coming out of this recession, we weren’t anywhere near the levels growth-wise that we were pre-recession levels,” says Anderson. So his team suggested QE.

Also as part of the case, the Fed had already brought down interest rates. But his team proposed a hold on federal fund rates. “We wanted to focus more on capital improvement projects through QE and bringing down long-term rates,” says Anderson.

He notes the main issue for the second case study was an overheated housing market, with prices rising significantly. “It was hard to remove ourselves from historical data, and from thinking about how the housing market and ensuring chaos was dealt with in 2008 and 2009. But we recommended a contractionary pause. This involved raising the federal funds rates more significantly than in the past, while simultaneously decreasing the rate at which the hypothetical Fed was dialing down QE.”

In reality when the crisis occurred, the U.S. Fed made its first move after the housing crash. It provided lines of credit to banks and financial institutions to help with lending and encourage spending, and followed that up with QE.

Read: U.S. Fed shouldn’t be data-dependent: Tal

The Sussex Tech team stood out, says Anderson, because they proposed creative policy solutions for both cases.

“We were given the option of providing an expansionary, contractionary or pause recommendation for each case study,” explains Martino. “But we proposed an expansionary pause and then, for the second case, a contractionary pause. We stood out because we took what we learned and used that to do more than repeat past policies.”

She adds, “An economy growing too rapidly is what happens before a recession. And, it’s important for [people] to understand that even though recessions do happen, there are things we can do to prevent them.”

Read:

• 68% of Canadians are financially literate: report
• This year, the Fed will be more defensive

College-level winners predicted December rate rise

In December, the team from Pace University in New York City won the college-level Fed Challenge for the second year in a row. They had to assess the current economy and make real-time policy recommendations through two presentations to Fed officials.

The team members were all economics majors, including leaders Katherine Craig and Daniella Gambino. The rest of the members were: Omar Habib, Melissa Navas and Yuliya Palianok, along with research assistants. Their coaches included Pace economics professors Gregory Colman and Mark Weinstock.

In the first round of this year’s challenge, the team structured their presentation like a Federal Open Market Committee meeting. As FOMC members, they discussed the pros and cons of tightening, easing and holding on rates, based on how unsteady the economy has been (volatile oil prices were, and continue to be, a major issue). Team member Craig acted more dovish than the rest of her teammates, and they chose to hold on rates.

In the final round, the team presented a unified front during their presentation and when questioned by Fed leaders. Craig says, “In December, we saw domestic data was picking up and it looked like inflation and wages were going to improve. So we recommended a 25-basis point rate rise.” And, as it turned out, they correctly predicted the Fed’s decision to hike later in the month.

The period between October and December 2015 was a turning point in the Fed’s policy approach, says Gambino. “The economy could have gone in any direction, so we also recommended increased communication from the central bank,” including more information in dot plots and analysis reports. “We even considered suggesting negative rates, since that had been brought up by the Fed.”

Read: U.S. Fed official to deliver plan to splinter big banks

Weinstock says this year’s team was more self-directed than past teams and did more research. For example, they discussed topics such as monitoring Treasury market liquidity in their presentations, which has been a Fed priority over the last year.