–Just Under 50% Believe Fed To Begin Tightening Too Late
–Most Expect Debt Restructuring By ‘Club Med’ Or Outside funding Aid

By Brai Odion-Esene

WASHINGTON (MNI) – The majority of top U.S. economic forecasters
believe that the greater risks facing the nation’s economy are deflation
in the near-term and inflation in the longer-term, according to a survey
by the National Association for Business Economics released Monday.

The Economic Policy Survey, taken between July 30 to August 10,
also revealed that just under 50% of the 242 respondents fear the
Federal Reserve will begin tightening monetary policy “too late,” while
they all expect 2011 will be difficult for countries such as Greece and
Spain, with most expecting that one or more of these countries will
either be forced to restructure their debt or call on an outside funding
source.

According to the NABE, the majority of the respondents believe
monetary policy is currently positioned appropriately and do not think
the Fed will alter its pledge to “keep interest rates exceptionally low
for an extended period” this year.

Nearly 59% of respondents characterized current monetary policy as
“about right,” with the remainder roughly evenly split between feeling
it is too stimulative and too restrictive.

NABE asked members about the risks of deflation versus inflation —
as outcomes of current monetary policy — and it said “a plurality” feel
the monetary policy risks are tilted toward deflation in the short run
but toward inflation later on.

Expanding further, the NABE said a substantial minority of 45% feel
deflation near-term versus inflation longer-term will be the highest
risk outcome. Roughly equal shares of 15% and 16% see outright inflation
or deflation as the bigger risks, with the remaining 24% feeling that
neither risk dominates.

Following the Fed’s Aug. 10th decision to reinvest principal
payments from maturing mortgage-backed securities and bonds into
Treasuries, the NABE said it conducted a special survey on key monetary
policy issues Aug. 25th. Panelists were asked whether they felt the
FOMC’s decision was appropriate and seventy-seven percent support the
move.

In addition, “Survey respondents are evenly split on the question
of whether the Fed will start selling mortgage-backed securities out of
its portfolio before the end of 2011,” the NABE said.

There is also “a healthy skepticism” regarding either the
difficulty of the Fed’s challenge or the general ability of the Fed to
achieve “good timing” in changing its policy stance.

According to the NABE, just under 50% think the Fed will begin
tightening policy too late while 36% think it will get the timing right.
The remaining 14% believe the Fed will tighten too soon.

Although 36% of respondents would prefer a “more restrictive”
monetary posture by the Fed, only 37% of panelists expect short-term
rates to rise in the next 12 months, the NABE said, with three-quarters
of those seeing an increase of either 25 or 50 basis points.

As for how effective the recently passed Dodd-Frank Act will be in
preventing another global financial crisis, Nearly 89% of the NABE
panelists feel it would have no or only a modest effect on reducing that
risk. Only 3% feel it would reduce the risk significantly.

The NABE survey also solicited members’ thoughts on current U.S.
fiscal policy, and 39% of the respondents said the current posture of
fiscal policy is appropriate, down from 44% in March. It said three
quarters of respondents oppose another stimulus package but rank
promoting economic growth a higher priority than deficit reduction.

They also support governmental action related to employment growth
but rank clarity on future tax and regulatory policy as the top factor
that would advantage employment.

And despite the woeful fiscal conditions of many U.S. states, the
NABE said three in five respondents suggest that the federal government
not continue to “bail out” the states, even after funds from the
American Recovery Act run out.

On the international front, respondents to the NABE survey expect
2011 will be difficult for the “Club Med” countries, such as Greece,
Portugal and Spain.

“Most are expecting that one or more of these countries will either
be forced to restructure their debt or call on an outside funding
source,” the NABE said.

With the debt worries in Europe pushing many countries to introduce
austerity measures to shrink their deficits and reassure markets, the
NABE said About 80% of respondents feel that austerity budgets will
reduce deficits, while almost 70% believe that such budget discipline
would be successful in calming sovereign debt fears.

However, nearly 40% of respondents feel that such budget cuts would
push economies into double-dip recessions, it said, and only 11% fear
that widespread austerity budgets would push the global economy into
recession.

The NABE said economists participating in the survey generally feel
positive about news that the Chinese government would allow the yuan to
appreciate against the dollar. “However, they were split on whether the
appreciation would improve the U.S. bilateral trade deficit with China.”

** Market News International Washington Bureau: 202-371-2121 **

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