Bloomberg News

Fed More Effective With Inflation, Funds Rate Goals

March 26, 2012

The Federal Reserve’s decision to spell out the optimal rate at which prices should increase in the U.S. and the possible trajectory of its benchmark interest rate will make policy more effective, a survey showed.

Almost seven of every 10 members polled by the National Association for Business Economics said the central bank’s plan to keep inflation rising at around 2 percent over the long term will improve the effectiveness of monetary policy. Six of 10 said releasing projections for changes in the so-called federal funds rate will also help.

Conversely, respondents were almost evenly split on whether the federal government was doing too much, too little or just enough to boost the economy, reflecting the lack of consensus among voters heading into a presidential election. When asked about specific policies, like extending the payroll tax cut or the credit on business investment, a majority supported the measures.

“There were fairly high marks for the Fed,” Jay Bryson, senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who helped compile the data, said in an interview. “There is much more consensus on the effectiveness or appropriateness of monetary policy at present than there is consensus on fiscal policy.”

Gone Too Far

While applauding the Fed’s efforts to make its intentions more transparent, most economists said the central bank’s pledge to keep interest rates low through late 2014 had gone too far. Just 6 percent of those polled said the rate should be kept low for that long or beyond. Twenty-six percent said the pledge should extend through mid or late 2012, 29 percent favored mid or late 2013, and 3 percent said through mid 2014. The remaining 36 percent said the Fed should provide no guidance.

On current fiscal policy, 35 percent said it was too stimulative, 34 percent said it was just about right and 31 percent deemed it too restrictive of growth.

There was more agreement about the future, with 53 percent saying the government should cut back, while 31 percent said it should do more.

The results show that more people are in favor of government doing all it can in the short run to keep the world’s largest economy going, while making longer-term decisions to trim the budget deficit, said Bryson.

“People are in favor of temporary sorts of things,” Bryson said. “They are saying, ‘We shouldn’t reduce those things right now. However I would prefer policy to be tighter in the longer run.’”

The business economists’ survey took place from Feb. 15 to March 6 and reflected the responses of 259 members. The National Association for Business Economics, founded in 1959, is the professional organization for people who use economics in their work.

To contact the reporter on this story: Carlos Torres in Washington at ctorres2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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