By Lucia Mutikani
WASHINGTON, March 22 (Reuters) – The Federal Reserve’s
aggressive easing of monetary policy is proving surprisingly
effective at blunting the blow to the U.S. economy from tighter
fiscal policy, according to economists who have been scrambling
to raise their growth forecasts.
Economists had feared higher taxes and deep government
spending cuts would stunt growth in the first quarter, but a
string of strong economic data has so far proven them wrong. And
they mostly blame the Fed.
“Monetary policy is beginning to gain some traction here,”
said Tom Higgins, global macro strategist at Standish Mellon
Asset Management in Boston.
According to Higgins, if it were not for the monetary
stimulus, the economy would probably be facing growth of a 1
percent annual rate or less. As it is, he expects growth to come
in at a 2.5 percent pace in the first quarter.
The U.S. central bank has held overnight interest rates near
zero since December 2008 and has pumped about $2.5 trillion into
the economy by purchasing Treasury debt and mortgage-backed
bonds in a bid to foster faster growth and lower unemployment.
On Wednesday, it recommitted to plans to buy $85 billion
worth of bonds each month and said it would keep buying assets
until it sees a significant improvement in the labor market.
Those actions have helped put the economy in better shape to
deal with the end of a 2 percent payroll tax cut, higher tax
rates for wealthy Americans and $85 billion in across-the-board
government spending cuts known as the “sequester.”
The easy money stance has given a boost to interest rate
sensitive sectors of the economy, such as autos and housing.
The commitment to easy policy also appears to be lifting
business confidence, which in turn is underpinning job growth
and the stock market. Nonfarm payrolls increased 236,000 in
February and the jobless rate fell to a four-year low of 7.7
percent.
“The message from the data is that in the battle between
fiscal drag and monetary stimulus, the Fed is winning,” said Jim
O’Sullivan, chief U.S. economist at High Frequency Economics in
Valhalla, New York.
Stunned by a surprisingly strong report on retail sales last
week, most economists rushed to raise first-quarter growth
estimates. JPMorgan pushed theirs up by an eye-catching
eight-tenths of a percentage point to 2.3 percent, while Goldman
Sachs increased theirs by three-tenths of a point to 2.9
percent.
Economic activity expanded at a meager 0.1 percent rate in
the last three months of last year, the slowest pace since the
first quarter of 2011.
MADE A MISTAKE
Economists also said they had been mistaken to believe that
businesses would retrench if it became clear deep government
spending cuts were going to take hold.
They said they had simply been drawing on lessons learned
during the acrimonious fight in 2011 to raise the government’s
borrowing limit, a battle that hit confidence hard.
“The chance we decided to take was for a more upfront impact
from sequestration; in reality that is not what we are seeing,”
said Adolfo Laurenti, deputy chief economist, Mesirow Financial
in Chicago. “Businesses have taken it at a more leisurely pace.”
Indeed, a Deloitte Growth Enterprise Services survey of
about 1,000 mid-market executives this month found little
evidence the spending cuts were worrying businesses.
About 72 percent of respondents said sequestration would not
affect their businesses and 91 percent said they had not put off
hiring because of the cuts. That could be an indication of the
confidence generated by the Fed’s willingness to aid the
economy, economists say.
Also helping the economy is the fact that banks are starting
to ease lending standards and household balance sheets have
improved after being ravaged by the housing market’s collapse.
“What we have been seeing for a while is households have
worked down their debt loads and they are now starting to expand
their borrowing and, across the board, bank lending is
increasing,” said Steve Cunningham, head of research at the
American Institute for Economic Research in Great Barrington,
Massachusetts.
“So monetary policy is becoming effective in that respect.”
Fed data this month showed household debt in the fourth
quarter grew at its fastest pace since early 2008, while a
measure of the burden of carrying debt sank to a record low.
In addition, consumer credit has increased solidly from last
year through January of this year and banks in January reported
stronger loan demand and easier credit standards.
Still, the economy is not out of the woods by any means.
Part of the expected bounce back in growth this quarter will
come from a buildup in business inventories, which means second
quarter growth could fall short of the January-March rate.
As a result of the economy’s firmer underlying strength,
many analysts now estimate government budget cuts could shave
off about 0.3 percentage point from GDP this year, half of what
was predicted by the nonpartisan Congressional Budget Office.
“The drag from sequestration is probably a little bit
smaller than we thought a month ago,” said Mesirow Financial’s
Laurenti. “We have a better economy that is in a better position
to absorb a negative shock.”
(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Phil
Berlowitz)
