This is a transcript from the recently held annual forecast meeting of the Forbes.com Investor Team.  Liz Ann Sonders: All right, let's launch this with what I suppose is one of the more interesting topics which is the Fed's shenanigans of late, with the most recent meeting, I think, bringing a move that showed that they were literally going to pull out all the stops. You saw it in the move in the target range. You saw it in their statement.  I was, you know, pleasantly surprised. In reality, I think they were really just bringing the target down to where the effective funds rate was trading anyway. So, I'm not sure if it was necessarily going to have an immediate effect. But I think what they mentioned in their statement--their willingness to do whatever it takes--I think was appropriate.  And I think I know we're going to talk a little bit about what's yet to come, which is the fiscal stimulus, which I think is an added step on top of the monetary stimulus. But I was intrigued, and I think we're finally going to start to get to the heart of the problem.  Vahan Janjigian: Were you surprised at all by how the market reacted to the news?  Sonders: Well, you know, that single day I'm never surprised with a move in either direction. But, I think one of the things that started to develop when we hit the lows on Nov. 20 was more and more days where the market was rallying on otherwise bad news. And that has the potential to be a sign.  Now, I think the Fed meeting was not bad news. But I think it was kind of carrying through that desire to look ahead and maybe see some traction starting to develop in the credit markets.  Gary Shilling: If you look at the Fed, I think they've had three stages. The first one really started the summer of last year--of '07--when they were trying to follow conventional monetary policy, cut interest rates. Well they couldn't even get the horse up on his feet with that one. I mean, they're pushing on a string. So they went to the second phase which was all the accommodations for non-bank dealership and everybody else, all the special facilities.  The horse, they got him to water but the horse wouldn't drink. And now they're in phase three, which is quantitative easing. And I agree with you. I think what they did yesterday in terms of the funds target, they're just admitting reality. But, they're really into quantitative easing. Now, whether they can shove the water down the horse's throat remains to be seen. But, I don't know whether you regard this as desperation or good news. But, have they got any ammunition left? You know, what have they got in reserve here?  Janjigian: I thought it was a move of desperation. And it tells me that the Fed's projections for GDP growth are still way too optimistic.  Shilling: I agree with you. I agree with you, and we certainly see this recession running through next year and maybe into 2010 depending on whether they can contain all the additional financial problems that seem to be surfacing. But, the idea it's going to end June 30 of 2009 on the dot, I don't see it.  John Osbon: Gary, can I stay with your horse for a minute? All right, since they've done all those things, and we've seen that not everything works, what else can the Fed do after this? Do they have anything left?  Shilling: Yeah, that's the point.  Well, I think what they can continue to do is simply bail out the financial problems as they come up. The Fed, the Treasury--I mean obviously they're working hand in glove. But now they're talking about as of Feb. 1, buying commercial paper-related securities. I'm sorry, consumer credit-card-related securities.  That's an area where it looks like people are--they're trying to cut back on anything discretionary, consumers are. And I think they're increasingly regarding credit cards, home equity loans, auto loans, student loans as discretionary. In other words, they get to the end of the month and they say it's a matter of putting bread on the table and gas in the tank, or making a credit card payment, financial responsibility goes out the window.  And there's a lot of that paper out there. There's about four times as much of those four categories of paper as there are subprime loans. And so I think they're bailing out that area. Commercial real estate is another area that's servicing non-financial junk securities. There's a lot more problems and the only thing you can say about [it] is they are getting expertise in how you bail out bad paper.  Carol Pepper: Well, I think there's also some good news in that they're continuing to signal that they're going to keep these rates low for the foreseeable future.  So, I think giving some visibility that it's not only that we're going to shock the market and keep them low now, but that we're going to keep them low for some time, is going to give some confidence and, again, some more visibility back into the market so that people who are trying to make plans, looking forward, can have a bit more confidence that they're borrowing costs will remain low.  And I think that will help on the business side--where the small businesses in particular are really hurting right now. They can't get financing, and it's been at a very high rate. So, if they keep the rates low over a period of time that will perhaps coax people back into the market.  Sonders: It's the prod. I mean, everything's a little bit of a prod. It's a prod to borrowers. It's a prod to lenders. There's that fear factor that says, "You know, we can supply all the liquidity we want but it's the horse to water thing." And that's not going to last forever. We don't know necessarily what the catalyst is, but I think we're starting to see some initial signs of a desire to take risk again.  Shilling: There's no evidence the banks want to lend. If you look at M2, which is 60 times bank reserves--in other words, normally you put $1 into reserves you get $60 M2. From August through November, reserves are up almost $600 billion, M2 was up about $250.  Shilling: You didn't even get one-half times, much less 60 times. And the banks don't want to lend ...  Janjigian: But, Gary, what's that going to do to currency rates?  Shilling: I've been an advocate of the dollar. Now with the Fed being now the lowest target of any central bank, basically zero, even below the Japanese central bank which is 0.3%, the dollar did feel the effects after the Fed announcement. But I think the dollar is strong simply as a safe haven, the best of a bad lot.  Janjigian: But, why is the yen doing so well against the dollar?  Shilling: Well, that's the underlining of the carry trade. In other words, the people who were basically borrowing in yen and investing in euros and other areas, I mean, as the world retrenches I think a lot of it's fear and a lot of it is simply the idea that interest rate differentials are not there anymore. So, they're unwinding that.
The Forbes.com Investor Team talks about the Federal Reserve's latest moves as it looks for clues for 2009.