By The Wall Street Journal
Business economists are split on whether the Federal Reserve's massive infusion of credit into the economy will lead to inflation in the next couple of years.
Half of 266 members of the National Association for Business Economics surveyed in August said the Fed's decisions to increase the money supply won't lead to inflation in the next few years, the NABE said Monday. Some 41% disagreed, though, citing "lagged effects of policies now in effect," "monetization of the debt" and "ineffective exit strategy" as their primary concerns.
The economists overall said they expect inflation excluding food and energy to average 3% from 2014 to 2018. "This may reflect their view that an excessively stimulative fiscal policy and a complicated exit from its quantitative easing policies over the medium term will result in the Fed tolerating a higher level of inflation than it desires," the NABE report said. The Fed aims to keep inflation between 1.5% and 2%.
Recent debate over the Fed's strategy for reducing its large holdings of government bonds and mortgage-backed securities has centered on timing. If the Fed waits too long to bring the programs to a close, the economy runs the risk of inflation. But if it attempts to wind them down too soon, while the economy is still weak, it could hinder the recovery.
The economists reached more of a consensus on overall monetary policy: Nearly 70% said it was "about right," up from 56% a year earlier. One-quarter of those surveyed said current policy was too stimulative.
The majority, 56%, said the Fed was likely to keep interest rates stable over the next six months, whereas 44% expect an increase.
As for U.S. fiscal policy, 35% said it was "about right," the highest percentage to say so since March 2008. But 50% of the economists surveyed said fiscal policy was too stimulative.
Evaluating a variety of proposals for a financial overhaul, the economists determined that consolidation of regulators and a revamp of ratings firms would improve financial stability and yield the most benefits for consumers and businesses with the least effect on credit.
