Half of Economists See 2 Or Fewer Fed Hikes in '18 -Survey

--Likely Impact of Bal Sheet Reduction Fairly Benign

--Negative Reviews of Trump Trade, Immigration Policies

--Pessimism Over Meaningful, Revenue-Neutral Tax Reform

By Jean Yung

     WASHINGTON (MNI) - A third of economists at big U.S. firms still say the

Federal Reserve's current monetary policy stance is too stimulative yet most are

not expecting the U.S. central bank to deliver the three interest rate hikes it

forecast for 2018, according to a new survey from the National Association of

Business Economics published Monday.  

     The panelists also viewed the likely impact of the Fed's gradual reduction

of its asset holdings as fairly benign, adding about half of a percentage point

to the 10-year Treasury yield over several years, the survey said. 

     Sixty-one percent of 176 respondents said the Fed's policy stance was

"about right," while 34% found it "too stimulative." About half expect one more

25-basis-point hike this year as forecast by the Federal Open Market Committee

in its June meeting, but the economists were split on likely scenarios for next

year. More than half of respondents expect two or fewer hikes with a plurality

of 28% seeing two. Only 17% expect three and 13% expect four. 

     "That result is not surprising to me. The Fed has been consistently more

aggressive in its expectations for future rate hikes, and the markets have

certainly been less aggressive," survey chair Richard DeKaser of Wells Fargo

said in an interview. "The overwhelming majority say policy is about right, but

there was a slight bias that some felt the Fed was too stimulative. My

interpretation is the economists think the Fed's going to retain a slightly

stimulative bias into next year." 

     Economists also had a wide range of opinions on the impact of the Fed's

plan to normalize the size of its balance sheet. Three-quarters of respondents

expect such action to boost the yield on 10-year Treasury notes, with about half

of them suggesting the increase would be 50 basis points or less.

     NABE's semiannual policy survey, conducted between July 18 and Aug. 2 with

184 members responding, revealed business economists generally felt that current

monetary and fiscal policies were appropriate to the business cycle. However,

respondents gave President Donald Trump negative reviews on trade and

immigration policy and viewed "meaningful" tax reform as unlikely. 

     A plurality of respondents, 46%, characterized current fiscal policy as

"about right," which was little changed from the March survey. More respondents

consider policy to be "too restrictive" -- 28% versus 20% -- but perspectives

were balanced. 

     The current outlook for the federal budget deficit is for it to remain in a

holding patter "consistent with neither providing a lot of gas nor stepping on

the brakes," DeKaser said. 

     "The perception is that the economy is basically at full employment and it

does not require massive stimulus to get it going or to lower the unemployment

rate," he said. 

     Looking further out on the horizon, while 62% of respondents favored a

reduction in the federal deficit share of GDP when compared with the

Congressional Budget Office's current 10-year baseline, 72% believed just the

opposite will happen. They see tax and spending policies as likely to increase

the deficit to GDP ratio. 

     "The view about fiscal prudence over the long run seems to be an

aspiration, not so much reality," DeKaser said. 

     The economists assigned a median probability of just 10% of Congress

passing "meaningful, revenue-neutral tax reform" in 2017 and a slightly higher

probability of 15% of that happening next year, reflecting much diminished hopes

for a tax overhaul compared to earlier in the administration.  

     Even in the unlikely event that revenue-neutral reform were to be passed,

it would not be a game changer for the economy, the respondents said. Over half

felt it would speed up GDP by less than 1 percentage point. About a third

projected an acceleration of between 1 and 2 points. 

     The economists were fairly certain Congress would not allow a breach of the

debt ceiling -- only 10% expecting the opposite -- but that's about where the

positive reviews end. The survey unearthed deep dissatisfaction among the

economists with the administration's trade and immigration policies as well as

the lack of action to address global warming and income inequality. 

     Asked to score the impact from recent policy decisions on a 1-to-5 scale,

with 1 being consequential in a favorable way and 5 being consequential in an

unfavorable way, the immigration executive actions garnered a 3.8 while foreign

trade actions got a 3.7, with the decision to disengage from the Trans-Pacific

Partnership receiving a 4.1.

     "There was definitely a strong tilt on actions taken thus far with regard

to trade and immigration policy that they were unfavorable and consequential,"

DeKaser said. "Economists tend to be more free-trade-oriented, and the

administration is moving the other way." 

     The desire for action among business economists on the issues of global

warming and income inequality also came as a surprise to DeKaser. Those surveyed

supported the carbon tax as well as educational policy changes to address these

problems. 

     "I think the majorities were so strong it almost reaches the level of a

call to arms to implement policies to address a problem," DeKaser said. "That

implies the problem deserves attention and that there's a willingness to engage

through policy actions."  

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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