MNI INTERVIEW: SF Fed VP: Fiscal Pol GDP Impact Could Be Small

By Sara Haire

     WASHINGTON (MNI) - San Francisco Fed Vice President Daniel Wilson said in

an exclusive interview with MNI that there could be a "downside risk" to

analysts' forecasts for a large boost to U.S. GDP from the Trump

administration's fiscal policy actions, based on research that shows a smaller

lift when policy is procyclical, occurring at the same time as an

already-in-motion expansion.

     According to Wilson and Tim Mahedy's San Francisco Economic Letter

published July 9, "the near-term boost to GDP growth could be two-thirds or less

of that from previous tax cuts."

     "It's hard to quantify exactly what that impact is [of fiscal policy on

GDP], but the point was really just that there's a downside risk to a lot of the

analyses that we've seen" said Wilson.

     As the Fed moves forward in determining appropriate policy, they will

likely need to become increasingly data dependent to adjust their forecasts

appropriately, especially given the infamous notion that monetary policy lags.

     Despite some analysts' increasing their forecasts for GDP in 2018/19 and

2020, the Federal Open Market Committee has refrained from updating their

forecasts by too much, instead choosing to let incoming data inform their

outlook. Kansas City Fed President Esther George said on Tuesday that

policymakers have to carefully monitor data, because "[r]ecessions can also be

caused by policy mistakes," she said.

     Recently, there has been concern over whether the imposed and threatened

tariffs could hold back GDP growth for 2018, but some analysts have claimed that

the boost stemming from fiscal policy will more than balance out the estimated

effect on GDP.

     However, Daniel Wilson explained that while there is a chance there could

be overlap, in his own view, "there's not necessarily a relationship between or

interaction between the effects of the tax cuts and the effects of tariffs."

--RESEARCH SUGGESTS DOWNSIDE

     Within their Economic Letter, Mahedy and Wilson cited several sources that

predominantly found the fiscal multiplier "is smaller in expansions than in

recessions."

     Despite this study not being the first of its kind, and in fact, the topic

has been "of great interest for academic economists in the last 5 to 10 years,"

the research has not "made its way to the mainstream into the wider general

public yet," Wilson said.

     It is relatively uncommon to have expansionary fiscal policy to further

growth this far along into an expansion. This procyclical fiscal policy is now

the largest since the Vietnam War, and a period of stagflation accompanied that

not long after in the 1970s.

     "I mean not every study finds the same results but I think the weight of

the evidence seems to suggest that the fiscal impact of stimulus is smaller in

expansions," said Wilson.

--WAITING GAME

     The advance estimate for 2Q GDP is on July 27, and while it is often

revised, this could give better insight into what effect the implemented fiscal

policy has had so far on growth.

     While Wilson and Mahedy's research stated growth may not add as much of a

boost as expected given the uncommon nature of this policy, there could still be

room for it to boost GDP given recent data showing not only has consumer

sentiment and business confidence been high, but retail spending and inflation

data have ticket up as well.

     Wilson explained that there are economists that subscribe to the idea that

positive developments in the economy warrant positive reactions from people,

which could be a semi self-fulfilling prophecy.

     However, the big question remains whether "increases in sentiment surveys

translate into actual increases in personal consumption expenditures and

business fixed investment," which there appears to be no definitive answer to so

far, explained Wilson.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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