WASHINGTON - 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."
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