Fed helping ease crisis, not fiscal policy: survey

WASHINGTON Mon Mar 2, 2009 3:48am EST

The federal Reserve Building in Washington in this September 16, 2008 file photo. REUTERS/Jim Young

The federal Reserve Building in Washington in this September 16, 2008 file photo.

Credit: Reuters/Jim Young

WASHINGTON (Reuters) - Emergency action by the Federal Reserve to ease the credit crisis has been appropriate but the fiscal policy measures may not be much help, according to a survey of business economists released on Monday.

Asked about the dollar, most of the economists in the National Association for Business Economics (NABE) semi-annual poll thought the U.S. currency was currently too strong for either the short-term or long-run good of the economy.

"There appears to be a growing consensus that monetary policy is at least heading in the right direction," said association President Chris Varvares.

"But we see a cautious assessment as to how much of an impact it is having on credit flows and economic activity. If anything, our respondents appear to be even less convinced of the near-term effectiveness of fiscal policy in turning the economy around," Varvares said in a statement.

The Fed has cut interest rates almost to zero and pumped around $1 trillion into financial markets via a range of credit easing measures to prevent lending from freezing up, amid a global credit crisis sparked by the collapse of the U.S. housing market.

This tipped the United States into a recession in December 2007 that has become a severe downturn, with growth contracting at a 6.2 percent annualized rate in the final three months of last year for the country's weakest economic performance since 1982.

"Almost 63 percent judged monetary policy 'about right' in this survey, compared to 55 percent in August 2008, while a shrinking proportion (23 percent) viewed policy as 'too stimulative'," NABE said.

Economists also expected headline inflation to fall to very low, or even negative, levels this year. But so-called core inflation, which excludes volatile energy and food prices, was forecast to bounce back above 2.5 percent over the next two to five years, and signaled that the Fed may have to abruptly start raising rates.

In addition, three-fourths of the economists expect the Fed to extend its action to the purchases of long-dated U.S. Treasuries and other credit instruments in order to drive down private-sector borrowing costs and stimulate consumer spending.

"In each case, a majority expects the policy to be successful," NABE said. The Fed has said that it might consider purchasing long-dated Treasuries if this would benefit broader private-sector borrowing conditions.

Cautious optimism on the impact of the Fed did not extend to the $787 billion stimulus plan signed into law by President Barack Obama last month, over which views were split.

"Business economists are broadly divided regarding the current posture of fiscal policy with roughly a third viewing it as too stimulative and another third seeing it as too restrictive, but only 22 percent characterizing it as 'about right'," NABE said.

A majority thought the stimulus package would have a modest impact in shortening the recession.

Polled on the outlook for the dollar, most economists thought its recent rise against the euro had been due to short-term safe-haven flows spurred by panic over the crisis and the uncertain outlook for the world economy.

"Slightly more than half of respondents believe that the dollar will resume its decline against the euro when the current global financial crisis and recession end.

"Another quarter believe that the dollar will stabilize to near current levels. Fewer than 18 percent believe that the dollar will continue to appreciate versus the euro," the NABE said.

(Reporting by Alister Bull; Editing by Jonathan Oatis)

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