Economists Doubt Benefits Of More Easing By Federal Reserve
September 13, 2012
Wall Street Journal
Economists expressed skepticism about the benefits of another round of bond-buying by the Federal Reserve, even as most expect the central bank to embark on such a course at its meeting Thursday, according to the results of the Wall Street Journal's latest forecasting survey.
Thirty-four of the 47 respondents—not all of whom answer every question—expect the Fed to start another round of large-scale asset purchases, known as quantitative easing, at its September policy-setting meeting. Another seven expect a move later this year, but not tomorrow. Just five respondents don't believe the Fed will take action this year. But at the same time, 28 economists said beginning another program this year is a mistake.
John Silvia of Wells Fargo notes continued weak economic data and rising market expectations point to a September move by the Fed, but he expressed doubts about its effectiveness. "It would not have much impact on near-term economic growth prospects," he said.
The economists don't see a large impact from a large bond-buying program. On average, they estimate that $500 billion in purchases would only reduce the unemployment rate by 0.1 percentage points and increase gross domestic product by 0.2 points over a one-year period. They estimate such a program would lift the inflation rate by 0.2 percentage points over 12 months.
Four Things to Watch at Fed Meeting
Indeed, forecasts for growth remain mediocre. On average, the economists expect gross domestic product to expand 1.9% in the third-quarter at a seasonally adjusted annual rate—barely better than the 1.7% rate recorded in the second. Growth is seen at just 2.4% for 2013. Such meager increases are expected to bring the unemployment rate down only slowly, to 7.7% at the end of next year, compared with the current 8.1%.
Chairman Ben Bernanke, in a speech last month at a central-bank conference in Jackson Hole, Wyo., cited more optimistic projections from inside the Fed. He pointed to models estimating that the first two round of large-scale bond-buying raised the level of economic output by almost 3% and increased private payroll employment by more than 2 million jobs. He also noted declines in mortgage rates and increases in stock prices tied to Fed action.
Some economists agreed that some of the benefits of asset buying would be indirect. "The major effect would be through the U.S. stock market on confidence, cost-of-capital, wealth effect on households and capital gains," said Allen Sinai of Decision Economics, Inc. "QE has worked and will work again."
Even though most economists doubt the effectiveness of more Fed action, the majority remain supportive of Mr. Bernanke. Twenty-five of 39 who answered the question said that whoever wins the presidential election should reappoint the Fed chairman if he is willing to serve another term.
Meanwhile, the economists gave congressional lawmakers and the Obama administration dismal marks for their handling of the economy. All but one economist gave a failing grade to U.S. fiscal policy, while monetary policy got better marks. Only about 20% of respondents gave the Fed a failing rank. Some 11% graded monetary policy in the A range, while 29% and 34% put the scores in the B and C category, respectively.
"Monetary policy has been terrible, but fiscal policy has been worse," said Stephen Stanley of Pierpont Securities.