Federal Reserve Homework - Nathan Kauffman

Aug 11, 2020  | 31 min  | Ep316 | Podcast

Podcast

When travelling to all corners of the country to find out what's happening, the Federal Reserve relies on branch offices to take a snapshot to help best from the economic picture. Nathan Kauffman is part of those eyes and ears for several states in the Plains and Midwest looking at several aspects of the economy including agriculture. This Michigan native has a worldly view following his undergraduate experience. Click here as Paul Yeager asks about outlooks, reports and old farm habits that are hard to break. 

 

Full Transcript: 

 

Paul Yeager  
I gotta say Malone college is not always a school. I'm familiar with what drew you from Michigan to go to Ohio.

Nathan Kauffman   
I grew up in northeast Michigan. And we had family in northern Indiana, Southern Michigan, parts of Ohio. So generally familiar with the region. It actually ended up being the case that my older sister had gone to that same college. And so I had visited her a few times like the campus like the culture, the student body. They're some of the faculty that I got a chance to meet. So it was I ended up going there largely because that's where my older sister had gone.

Paul Yeager 
So following your sister, but what was your academic interest then? Was it always economics?

Nathan Kauffman   
It was not. And it was actually a little bit of a meandering journey to economics that I don't always recommend to undergraduate students. I had studied chemistry actually in college at Malone. I spent some years after that, working before going back to get my graduate degree in economics. I spent a few years living overseas and it was really that experience overseas that got me interested in economics and Applied Economics and agriculture specifically, which is what drew me to Iowa State.

Paul Yeager    
So your degrees in chemistry and you go overseas was it is a bosnia is that what I've read where you've been

Nathan Kauffman  
Yep, I spent three years living in northwest Bosnia.

Paul Yeager    
What was the draw? I mean, you talk about a job, but what exactly that's quite a jump to go. Yeah.

Nathan Kauffman   
My wife and I had been married for a few years at the time. And we had talked about having some experience overseas before, you know, sort of settling down with the family and thinking about careers and that kind of thing. We were young at the time. I think we went to Bosnia when we were probably 25 years old. So we had talked about having some international experience and the church that my wife and I had grown up in what place volunteers to work with local partner organizations and typically underdeveloped countries. And it just so happened that bosnia was one of the places where they needed some people to be and we said, Yeah, we'd go and, you know, three years later, different kinds of experience.

Paul Yeager    
So then it's Bosnia, to Iowa State.

Nathan Kauffman   
Then we came back from Bosnia and went to Ames to just study economics specifically at Iowa State. Yeah.

Paul Yeager   
When you come on campus as a grad student is different than an undergrad. But when you come as a grad student with yours in a, what couldn't have been that far removed from a war torn country? What perspective Did you think you brought at that time?

Nathan Kauffman    
Yeah, that's a great question. And I think that that's actually one of the things that has allowed me to be a little bit more curious and connected to what's going on in the real world is just by observing things in Bosnia. Everything was very different. The systems were different. The culture was obviously different. We learned a different language. And so it caused you to constantly be aware of what sorts of things you are observing. And that's a big part of economics, I think is is observing what's happening and asking questions about it. So I think that that experience did formulate a lot of my interest in economics and and what came after that. Obviously, spending Six or seven years out of school before going back to graduate school was different. A lot of students go right back to grad school after after their undergraduate degree. So that was also a little bit different for me.

Paul Yeager  
I would imagine and then the US perspective. I mean, you always hear people when they go overseas, and they talk about Well, yeah, the news in the United about the United States. Totally different than what may have been read about or printed or on television. So what was the view of the United States economic system? I mean, you've already got to be paying attention to that. I'm guessing when you're over there.

Nathan Kauffman   
Yeah. You know, we spent a little while living in Belgrade, Serbia, and then a little while living in Bosnia, and they were two very different areas. They came out of a war. Of course, the United States was involved in that as it related to the breakup of Yugoslavia. And, you know, a lot of people that we would interact with, they didn't always like Americans. You know, so it was an opportunity to, I think, break down some of those stereotypes and at the same time, You know, for us being able to see things that didn't always match with what the stories might have been, you know, that we heard growing up in the United States. You know, it's a beautiful country, and obviously a lot of difficulties that have that have played out over there over time. But you really grow to appreciate it and you make friends and, you know, it sort of becomes a different kind of home when you spend that kind of time there.

Paul Yeager   
So you get into the point of looking at data, more than stories.

Nathan Kauffman    
Yeah, but, you know, we spent I spent a day or two a week in the, in the volunteer position that we were there just going into villages and meeting with beneficiaries of various programs. And so you got, we got to hear stories that you know, I, I consider that a privilege because, you know, you don't get those kinds of opportunities to see and hear those kinds of stories. So that even fits well, I would say and what I do now, because we do, obviously pay a lot of attention to data, but at the same time, we want to make sure that we understand how that data is playing out in the real world and today Take a lot of value in getting anecdotes from industry. And you know, people in the region.

Paul Yeager    
I just was watching an American Experience PBS show about Ronald Reagan. And they always said about Reagan, what he really cared for. And you could tell him present him a problem. But when you showed a real person that was impacted by that problem, it changed his perspective. So they said, if you ever wanted to get something done, you brought a real person. So that kind of sounds the way you've kind of matched your data and story when it comes to the lens of your job.

Nathan Kauffman 
Yeah, and I would still tell people, and I tell people this as we're trying to recruit for new economist positions, that one of the benefits of being at the Fed is that we do still very much value, the research process and data and all of those things that go into trying to uncover new thoughts and ideas. But at the same time, we really value being able to interact directly with businesses and associations and different groups in the region. And it gives us a lens into what's happening on a day to day basis that we might not Be able to get otherwise just by doing research connected to data. So I think I think it needs to be both ways.

Paul Yeager    
So you go to Iowa State, you're there a couple of years, then what happens?

Nathan Kauffman    
Well, so we went to Iowa State in the fall of 2007, which was an interesting time to be starting a program and economics with with the recession in, oh 809. When I began the program at Iowa State, we had our first child who was two years old at the time, we had another three while we're at Iowa State in the graduate program, which again, is a little non traditional. So we spent about five years there in Ames, studying economics working through that PhD program. And after that is when I had joined the Fed, largely to work toward the things that I had been equipped with the tools that I would state in terms of understanding economics and how to think about current events connected to that. So began this position at the Federal Reserve Bank of Kansas. City in 2012.

Paul Yeager    
And that position, you're in Omaha, but you've got Kansas City in the name. That took me a little bit of an adjustment to figure out how that all works. I mean, the the Federal Reserve has branches all over your read about the St. Louis district, the Kansas City district, the Denver, the Chicago, what give me a little understanding of how and why it was set up that way?

Nathan Kauffman   
Yeah, that's a great question. And it's one that we try to make sure that people do understand because we think it's a primary benefit of how we're structured, which is that the Federal Reserve System has regional offices that are largely tasked with incorporating views from within that region into broader discussions pertaining to monetary policy and other aspects of the economy. So for us, our head office is Kansas City. And we have seven states in our region that include Nebraska, Kansas, Oklahoma, Colorado, Wyoming, the northern part of New Mexico in the western part of Missouri. It's an interesting history lesson. To go into why the boundaries of that zone, but that's our district, and we have branch offices then in Omaha, Denver and Oklahoma City. So the regional presence that we have really is intended to try to incorporate the regional views that would be important in this district. And each office is across the Federal Reserve System is doing something similar. So it's a way to make sure that in conversations about monetary policy, which is obviously very national, and affects things very much in aggregate, that the views from very different parts of the country, very different communities, different industries are all part of that conversation. And so my job a big part of my job being in Omaha, then is to incorporate views from Nebraska specifically, but then because of the concentration of agriculture that we have in our region, also more broadly connected to ag.

Paul Yeager    
Unless you've moved in the last decade, you're right there in the downtown area. Let's that is I look at the buildings behind you and recognize them and insurance and finance has always been a part of downtown Omaha. Has it changed? In 2020?

Nathan Kauffman    
You know, yeah, it's 2020 has changed us in a lot of ways. I think, you know, my commute time to the office this morning was was was pretty, pretty minimal. A lot of people obviously still working from home. You know, the downtown is probably more quiet than than what it has been in the past. I think people asking questions about what the future might look like in terms of office space and those sorts of things. But Omaha is also a city that has a lot of different parts of it that are really doing quite well, at least they had been prior to the pandemic I think are generally positioned pretty well. And to your point about having a number of different industries. It is a pretty diverse economy that we have in Omaha and the broader region. So I think that also would position it well you know, once the once we get past the panda not

Paul Yeager    
pay attention to what comes out of one of your neighbors over there. Creighton University Ernie Goss's rural Mainstreet index. And he also has another one that the business conditions and we look at those and report on those because they're very similar to the states that we have on our, our programs reach. And he surveys, bankers and those on Main Street. How similar are your surveys? And how different are they?

Nathan Kauffman  
I guess first, you know, I would, I would think that for the most part, the sentiment that we are capturing from the respondents of those surveys would be pretty similar. Our region is obviously different. I know his surveys, I think go a little bit southeast of here in our district is more west and southwest. We do have a lot of community bankers in our region. And you know, we're interacting with those bankers to hear how they're describing conditions in the communities obviously have a lot of connection to agriculture and so those linkages definitely come through I think in the sentiment, I think definitely as we've compared results, you know, I think that they're generally pretty consistent in terms of that overarching sentiment, but probably on the nature of just where the geographical differences are, I'm sure there would be some nuance in terms of those industries that are feeling more pressure than others. You have to look at all industries. Manufacturing, agriculture is not where you stop. And I'm not saying that's where earnings research stops, but you have to parse through a lot of data. And then I guess back to our original conversation, you got to parse through stories. Yes, you can see I will from your office window. How do you not necessarily factor in what's going on over there in agriculture and manufacturing and everything else you survey versus what goes in in your district? Yeah, that's also a great question. And one way that we make sure that we gather anecdotal input that is specific to our region is through our boards of directors. So the Omaha branch would have a board of directors, we have seven individuals from Nebraska on that board. Our other three offices would also have directors that serve on those boards. And so we would ask them questions on a regular basis for our board meetings, to hear their input specifically about the regions in which they're located. It may also be the industries in which they operate, and agriculture would be one of those. So I think that it is, we do try quite hard to make sure that we're capturing all of the voices and views from our region, as it relates to an industry like agriculture, though, to your point. I can, you know, I can see across from Iowa here, but agriculture is also a global industry. And so we do need to understand what's happening and in other parts of the world as we characterize developments in agriculture, so the boundaries as it relates to industries are probably a little bit more blurred in the sense of how to think about either challenges or opportunities there. So it goes a little bit both ways in terms of trying to characterize specifically from the region but then also trying to be clear about what some of the things that we might And one particular industry might be,

Paul Yeager    
am I looking at your major presentation location now to these groups? Because you've got speeches published on the Internet of Things, and I would imagine part of your job used to be traveling and going to Hastings or going to Lincoln and making some type of presentation. Are you? A Do you miss that be a how's that changed how you do your job?

Nathan Kauffman   
Yeah, you know, I think that we all are trying to do the best we can under the circumstances. And we're all leveraging technology as best we can. And using video conference and other platforms. I'm not sure that there's a substitute though, quite honestly, from being able to meet with someone in person and see and experience firsthand what might be going on in a community. So to give you an example, we would usually spend a couple times a year visiting specific communities in Nebraska whether it's Broken Bow or McCook or somewhere else across the state to learn what's having in that community, but also to kind of see and experience that it's all part of that story that goes into better understanding things. So, you know, we do miss being able to do that, because interacting with the public and with businesses with trade groups is a way that we better learn about what's happening. So I think that it will be important for us to be able to get back to that point. But we all are able to, like I said, leverage this technology to have some of those conversation. And we're, and we're doing, you know, roundtable discussions and other things with various groups across the region and even nationally, as a substitute for it for right now. But you know, it would be nice to be able to get back to the point where we can, you know, meet and interact face to face.

Paul Yeager    
I would imagine the lunchtime conversations while you're waiting to speak or somebody else's that that's invaluable. For a perspective, as you said, the anecdotal part of that discussion, and you're missing that. Yeah, I would imagine that would be a major thing.

Nathan Kauffman    
No, yeah, there's a lot of those conversations that come about that maybe aren't necessarily planned, but it all is part of it. developing relationships with the people that, you know, we want information to better understand things. But we also are a resource here to be able to provide information. And generally speaking, you know, that relationship is easier when you're able to do it in person as opposed to, you know, through a, through a platform like this.

Paul Yeager  
I also No, you can't go and give comments or do interviews at certain times. You're part of the blackout period. We're talking here in early August, and I had to wait a few days. How is that? Why is that needed for you to not be interacting with others?

Nathan Kauffman    
Yeah, we have the Federal Reserve has eight times per year meetings that are referred to as the Federal Open Market Committee meetings. And these are the presidents of each of the regional Reserve Banks along with the governors at the board of governors in Washington, DC, that meet to discuss monetary policy issues and ultimately interest rate, the path of future interest rates and that's a that's a sensitive type of meeting where you The information during the course of the week before that, and the week of that meeting, is all part of a process that leads into an announcement that happens, you know, it was like it would have been last Wednesday. And it's just a way to make sure that the information that we're assembling and then sharing with those leaders that are participating in those meetings is kept confidential, and that there would not be some sort of information that that ultimately comes into the public domain that we would not want that to happen. So it's just being careful to make sure that there's not something that we wouldn't later you know, regret.

Paul Yeager    
That meeting revealed a continued to hold on lower interest rates, the benchmark and other things. What else is that data? The most recent report? how healthy are we economically in the United States?

Nathan Kauffman    
You know, that worry, you know, you asked the question earlier about 2020 and sort of some of the changes and You know, obviously, what's very unique about this year is that the path of the economy is very tied to what seems to be happening on the healthcare front. And in the last recession, we would have worried about a different kind of market, it might have been housing, it might have been banking, financial more generally. And now we're paying a lot of attention to health metrics. And we're paying attention to, you know, what's happening with a number of hospital beds and places and you know, ICU and other things like that, that we might not have looked at in the past. So my point in that is simply to, I think, reiterate and underscore that the path forward for the economy is very much tied to the path surrounding the pandemic surrounding the potential for a vaccine. And then obviously, how businesses and industries respond accordingly and make decisions for what they expect to happen alongside that path. So I think that's where we've been for the past five months, and there's a great deal of uncertainty as we've kind of gone up and down a little bit in terms of the number of new cases and such Ultimately, I think seeing that there could be a little bit longer time that passes to get back to something that might be more normal.

Paul Yeager    
We have infections in your district just like we do in other parts. So are we tied economically in your region? To what is nationally reported?

Nathan Kauffman    
Yeah, you know, there's obviously a lot of differences from one state to the next even in terms of how the pandemic is playing out and has been playing out. Certainly areas that are more densely populated seem to be experiencing the pandemic differently. rural parts of our region seem to be experiencing it differently even than in Omaha or Lincoln. So I think that that's important to recognize. The states in the Midwest, generally speaking, have not seen the same kinds of impacts from the pandemic, but at least part of that I think is, is connected to the industries that we have that operate in this region. We don't have as high of a country situation for example of leisure, hospitality travel and tourism just to give an example. So a city like Las Vegas or a state like Hawaii, that is very dependent on travel and tourism has seen a much more significant impact connected to the pandemic because of what that has caused people to do, versus industries in this region that many of them may have been, at one point considered essential businesses that would need to continue to operate. So I do think that you see some differences across states just on the basis of the industry mix. But nonetheless, there are still going to be significant challenges even here in Omaha.

Paul Yeager   
It used to be that the adage was the Midwest, the middle part of the country last in last out first and first, you know, is the way on does that hold now with this pandemic?

Nathan Kauffman   
In this region, the pandemic had a delayed impact relative to what you would have seen in other places. It was probably a couple weeks later to where you started. To see the numbers pick up in terms of cases and businesses that had started to close. To my point earlier, though, I don't know that we saw the same kind of impact, we had seen some of the data that we would measure would show that about 30% of small businesses in our state would have closed during the peak of the crisis back in April, versus a number nationally might have been closer to 50%. And some states that would have even been north of that. So I think that it is it has been the case that it's been a little bit less here. But you know, that's still the impact that we've seen is still substantial. And there still will be industries leisure and hospitality and travel being some big ones that are going to take a while I think to come out of this.

Paul Yeager    
agriculturally though. We have corn that's nearing $3. We have a ridiculously large crop. This week, one of the private estimates put it at way above record. That's gonna mean a lot of supply, there's a big concern about supply. How does that play out in this region on an economic whole?

Nathan Kauffman    
Yeah, so agriculture has a lot of linkages in this region, even if it's not farming directly that plays into the economy, because manufacturing is tied to agriculture and transportation is tied to agriculture. And there's a number of communities that would be tied very closely to Ag and banking. So the indirect effects of what happens in agriculture do spill over into the rest of the economy. In April, I would say again, at the peak of the crisis, we worried a lot about sort of what the health of the industry might be. This was a time when ethanol plants were closing quite dramatically. meatpacking plants were closing because of Cova disruptions. trade was a real question. The last couple of months, we've seen some of those things improve a little bit and there have been some government support programs that I think have allowed some amount of relief to be able to offset the challenges. To your point, though, about location prices. This is an environment that ag has found itself in really for the past five years or so or more in some places. So while I think that there may be support that allows producers and the industry at large to get through 2020, then going into 2021, those large supplies are likely to continue to weigh on prices and profits into next year, which is almost certain to effect then how producers will need to make decisions and how the industry positions itself going forward.

Paul Yeager  
I know you get the question and it's usually talked about anybody who studies the ag industry is are we setting ourselves up for another, you know, 80s farm crisis of sorts, I know in the past you've it's been said we have better interest rates and that's one thing holding us up and I know some balance sheets are better. land ownership is a little more stable. We've got the past to help us in the future. But But How are we setting right now?

Nathan Kauffman    
Yeah, you know, people will ask a lot what happened in the 1980s? And how to think about that in comparison. And, you know, with all of the things that you mentioned, those are different now than they would have been in the 1980s. And in the 1980s, the challenges that emerged happened very quickly and over the span of a couple of years increases in interest rates, sharp declines and land values and ultimately, loan defaults. I think one of the key differences this time has been that it has been extended over a longer period of time. As I said, it's been five or six years now in terms of more subdued profits to where producers have had to think, Okay, what can I do to better position for the next year, and in any given year, there's maybe been a little bit more stress financially, but not to the point that would that it would have been an outright crisis. So I think that I would worry less about there being imminent crisis in any given year. Now, of course, the pandemic has thrown a lot of that into In terms of uncertainty, but I would probably worry more just about what the longer term trend has been based on the past five or six years, and again, to the point of large supplies here and and globally, what that might mean for prices going forward and ultimately profits. So we pay attention not just to what's happening right now, but then also how that might factor into, say, the next 10 years.

Paul Yeager   
We've also had government programs that have allowed stimulus money to come in the form of MFP. One and two. However, I guess this is more of a political question, but not a political question. But you're gonna take it that way anyway. To given the presidential election, I mean, some of that has to play into how do you factor looking forward? The politics just like it would be the weather, two things unpredictable, that we know influence an economy, which can't really quantify on what it does for the economy.

Nathan Kauffman    
Yeah. So I think When we try to get our assessment of what the markets might look like, we would, we would certainly want to look at those fundamentals of supply and demand and take into account what's happening globally and trade flows and, and things that we know on the basis of data. But then recognize where there might be sources of uncertainty. And we may describe those as, you know, potential factors that that are that are upside risks or things that would also be risks to the downside. So I think that we tried to describe those that way. But it would be very difficult to try to forecast on the basis of potential policy, or even for a lender for that matter to make a decision on on financing on the basis of what programs might look like in 2021. And so I think where we found ourself in at the beginning of each of the past three years in advance of some of the programs that you referenced is to say that the markets look like they could be a challenge again, and there could be more financial stress, but in each of those years there has been some sort of program then that has mitigated or offset some of the weaknesses that we probably would have observed without them. So that's sort of how we go about our discussion of the conditions, but recognizing that there's going to be risks to either side.

Paul Yeager  
Never a dull moment for you isn't,

Nathan Kauffman    
then certainly not in 2020.

Paul Yeager   
All right, what's the rest of the day? Like? What are you going to read? What What's something that folks should be looking at, to kind of help better understand what you're looking at?

Nathan Kauffman    
Yeah, you know, we obviously follow markets on a regular basis. But we're we're also paying attention to things that are broader than that, you know, pricing not just from commodities, but even on the retail side of things and tracking what's happening in terms of consumer behavior. This massive shift to consumption at grocery stores and supermarkets has big implications for what happens on the farms and producers from from a raw material perspective. So you know, we try to pay attention to all of those data points. We try to interact with as many people as we can. Like I said, we're coming off of a couple of weeks of a policy meeting. And now sort of starts the time leading into September where we are reaching out in formulating our questions that we want to understand going into our next FOMC meeting and policy cycle. So you know, even having these sorts of conversations and taking questions from people, those are things that we will do quite regularly so that we have a better sense of how to think about the pulse of the of the industry in the region.

Paul Yeager  
I always like a good question, what was one of the questions from last month?

Nathan Kauffman    
So we've been trying to understand the impact of the pandemic on supply chains and supply chain disruptions. And so we will ask, whether it's our contacts in the region or you know, a specific industry, to what extent they may be experiencing challenges in the supply chain and how that might be factoring into any sorts of pricing pressures. So is it difficult getting materials of a certain kind for example, if you're a manufacturer or you know, in turn of commercial real estate, what is that? You know, what does that market look like? And are there disruptions there that we should be thinking about and pricing pressures? So we've asked a lot recently about the health and strength of our supply chains. And it goes back to, to my comment about the shift in consumption to supermarkets as opposed to restaurants. And, you know, that holds a lot of I think, importance for what happens in the broader economy in terms of how those supply chains might be holding up, both here and globally, because we do focus also on what supply chains look like across borders, you know, here in China and other places.

Paul Yeager    
Never, uh, like I said, a dull moment. But Nathan Kaufman, I appreciate your time. Thank you so much for your insight. And we'll talk again and then we'll just we'll skip all the formalities and just get nitty gritty economy. I was how about that.

Nathan Kauffman  
That sounds great. Thanks, Paul. Appreciate it.

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