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Economists divided over Fed's next direction

Economists are satisfied with the Fed's current interest rate policy, but they're divided over how the central bank should proceed over the next 12 months, a new survey finds.
/ Source: The Associated Press

Economists are satisfied with the Federal Reserve's current interest rate policy, but they're divided over how the central bank should proceed over the next 12 months, a new survey finds.

The latest semiannual survey by the National Association for Business Economics, set to be released Monday, also showed that economists are divided over how the government should stimulate the economy. Most oppose another stimulus package but rank economic growth as a higher priority than deficit reduction.

"The survey shows the uncertainty about the current state of the economy and how weak it truly is," said Lynn Reaser, NABE's president and the chief economist for Point Loma Nazarene University, in an interview with The Associated Press. "No one knows where the economy is truly heading."

Uncertainty over the fate of Bush administration tax cuts, which are due to expire by year-end, also is feeding into the muddled outlook, Reaser said. A majority of those surveyed don't believe that any of the individual income tax cuts, dividends tax cuts and capital gains tax cuts should be allowed to expire. Reaser stressed that the economists surveyed are looking for more clarity on future tax and regulatory policies that could help improve the job picture.

Of the 242 economists surveyed, nearly 59 percent of respondents characterize the Fed's policy of keeping interest rates near record lows as "about right." That's down slightly from 66 percent in March. But when asked what monetary posture they would prefer to see over the next 12 months, there was no clear consensus. Thirty-six percent of those polled favored a "more restrictive" policy, while one-third preferred "more stimulative" moves. The remaining 31 percent would vote for the Fed to maintain its current position.

Roughly half of those polled believe the Fed will start tightening monetary policy too late to stave off inflation. A similar number think the recently passed financial regulation bill will only modestly reduce the risk of another global financial crisis.

As for the government's fiscal policy, the survey showed that 39 percent of NABE's members believe that the current posture is "about right." That's down from 44 percent in March, but slightly above the 35 percent who held that view a year ago.

The results from the survey, taken July 30 through Aug. 10, come as new figures issued Friday show the economy is weaker than expected, and the outlook for the rest of the year is looking bleaker. The Commerce Department reported that gross domestic product grew at a 1.6 percent rate in the April-to-June period. The initial estimate was 2.4 percent, and even that was anemic. Meanwhile, home sales are plunging and consumers are saving more and spending less as the unemployment rate remains stuck at almost 10 percent.

Federal Reserve Chairman Ben Bernanke is struggling to build consensus among Fed officials about what steps are needed to give the economy a lift. Bernanke said in a speech at the Fed's annual conference Friday that while he sees the economy improving next year, the central bank remains ready to take extra steps to stimulate the economy if necessary, including buying more debt securities in order to keep interest rates low.

The Fed's goal in buying more debt securities would be to further reduce already low rates on mortgages and other loans, to encourage people and businesses to spend more. Whether debt-shy consumers and tight-fisted banks would actually agree to spend and lend isn't clear.

Adding to the economy's woes are mounting fiscal problems on the state level. About 60 percent of NABE members responding to the August survey agree that the federal aid allocated to states through the recovery act was appropriate given the state of the economy at the time.

But a similar share of panelists don't recommend continued state bailouts, even after those funds run out. Economists said reducing the number of unfunded mandates from the federal government could work to correct states' fiscal imbalances in the future.