–Opinion Split On Costs Of Fiscal Austerity In Europe Vs Benefits

By Brai Odion-Esene

WASHINGTON (MNI) – The majority of its member U.S. economists
believe the Federal Reserve’s current monetary policy is “about right,”
and expect short-term interest rates over the next 12 months would
remain about where they are currently, the National Association for
Business Economics said Monday.

Its National Economic Policy Survey, which polled 259 members for
their views on a number of policy issues, also found that a large
percentage see fiscal policy becoming “more restrictive” over the next
two years.

The NABE said 58% of respondents indicated that current monetary
policy is “about right”. On the other hand, roughly 35% said monetary
policy is “too stimulative,” while just 7% view current policy as “too
restrictive.”

“A sizeable majority — 71% — predict that short-term interest
rates will remain at about their current level for the next 12 months,”
the NABE said, while of the remaining 29% who think that short-term
rates will increase over the next 12 months, “more than half (55%)
indicated that interest rates will rise by 25 bps or less and about
23% look for short-term rates to rise between 26 bps and 50 bps.”

Only 10% — about 3% of all survey respondents — expect short-term
interest rates to increase by more than 50 bps over the next 12 months.

The NABE survey said only 27% of the panelists view higher
inflation as a bigger risk over the next three years than deflation,
while 44% believes that neither inflation nor deflation is a risk for
the next three years.

Over 20% indicated deflation is a risk in the short term but that
inflation would emerge as a larger risk toward the latter part of the
3-year period. Only 7% view deflation is the primary risk.

As to what actions the Fed should take going forward, “about one
half of the survey respondents said that they prefer that monetary
policy remain ‘unchanged’ over the next 12 months,” the NABE said, with
only 9% of respondents indicating a preference for more stimulative
monetary policy over the year, while 41% want more restrictive policy.

Regarding the Fed’s drive to expand its communication and improve
the transparency around its policymaking, the NABE said a majority of
those surveyed believe the Federal Open Market Committee’s 2% long-run
inflation target “has increased the effectiveness of monetary policy.”

In addition, 59% said the FOMC’s new policy of releasing
projections of the federal funds rate in its quarterly Summary of
Economic Projections has also increased the effectiveness of monetary
policy.

While divided on the proper path for monetary policy, the NABE said
there was more agreement about future U.S. fiscal policy.

“A slight majority (53%) of respondents indicated they would prefer
fiscal policy to be more restrictive over the next two years, and an
even larger percentage (58%) expects it to be more restrictive,” it
said.

The numbers of respondents that prefer a more restrictive fiscal
policy is up compared to the previous survey conducted in August, and
the number of those that expect it has declined. In the August survey,
49% of survey participants said they preferred a more restrictive policy
while over 70% said they expected it.

On the other side, “a sizeable” 31% of respondents in the current
survey would prefer fiscal policy to be more stimulative over the next
two years, the NABE said, but only 14% actually expect fiscal policy to
be more stimulative over the next two years.

With regard to the best strategy to tackle the massive government
deficits, “the vast majority of survey respondents favor some
combination of higher taxes and reduced spending in order to reduce the
federal budget deficit, with the general view tilting more in the
direction of spending reduction,” the NABE said.

The survey also included a question about the euro area debt
crisis, and found that nearly six out of 10 respondents believe Greece
should leave the Eurozone and revert back to its own currency, while 42%
thinks Greece should remain in the monetary union.

Meanwhile, “Opinion was almost evenly split as to whether the
short-term costs of fiscal austerity and its risks to growth outweigh
the benefit of securing the buy-in of Northern Eurozone nations and
creditors,” the NABE said. While 51% of respondents think the short-term
costs do not justify the benefits, the other 49% believe the opposite.

** MNI Washington Bureau: 202-371-2121 **

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