NABE Panel: Monetary Policy Currently Appropriate

A majority of the NABE Policy Survey panel thinks that Monetary Policy is currently positioned appropriately and do not believe the Federal Reserve will alter its pledge to “keep interest rates exceptionally low for an extended period” this year. Nearly 59 percent of respondents characterize current monetary policy as “about right,” with the remainder roughly evenly split between feeling it is too stimulative and too restrictive. 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, and a plurality feel the monetary policy risks are tilted toward deflation in the short run but toward inflation later on. Roughly half feel the Fed will start tightening too late and a similar share think the recently passed financial regulation bill will modestly reduce the risk of another global financial crisis.

Respondents were asked what monetary posture they prefer versus what they expect over the next 12 months. They were nearly evenly split among the three options, with “more restrictive” garnering 36 percent support, “more stimulative” 33 percent, and “unchanged” 31 percent. Only 37 percent of panelists expect short-term rates to rise in the next 12 months, with three-quarters of those seeing an increase of either 25 or 50 basis points.

NABE members were asked about the risks of deflation versus inflation as outcomes of current monetary policy. A substantial minority of 45 percent feel deflation near term versus inflation longer term will be the highest risk outcome. Roughly equal shares of 15 and 16 percent see outright inflation or deflation as the bigger risks, with the remaining 24 percent feeling that neither risk dominates.

NABE members exhibit what might be termed 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. Just under 50 percent think the Fed will begin tightening policy too late while 36 percent think it will get the timing right. The remaining 14 percent believe the Fed will tighten too soon.

Panelists were asked whether they felt the Fed’s August 10th decision to reinvest proceeds from maturing mortgagebacked securities and bonds into Treasuries was appropriate. Seventy-seven percent support the decision.

Finally, survey respondents were asked to consider how the financial regulation bill, which was recently signed into law, would affect the potential occurrence of another global financial crisis. Nearly 89 percent feel it would have no or only a modest effect on reducing that risk, with 52 percent indicating that it would reduce those risks only modestly. Only 3 percent feel it would reduce the risk significantly.

Percent of NABE Panelists Who Consider Current Policy to be “About Right”

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*Survey note: Because most of the survey responses were submitted before the Federal Open Market Committee’s (FOMC) August meeting, a special survey on key monetary policy issues was conducted on August 25th. This limited subset of monetary policy questions garnered roughly half the response rate of the original survey so interpretation of those results must be considered carefully. The larger sample of the earlier results showed 75 percent of respondents supporting current monetary policy as appropriate versus the 59 percent in the more recent smaller sample. The initial results also showed 53 percent expecting an interest rate hike in the next 12 months versus 37 percent in the latest survey. Although the change in the sample size might explain these shifts, the Fed’s decision to reinvest maturing mortgage securities and bonds and recent further evidence of economic slowing were probably at least partly, if not primarily, responsible.

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