Fiscal Tightening Should Be Only 1% to 1.5% of GDP; A "Small Bargain" Appears More Likely Than a "Grand Bargain"

NEW YORK and LONDON, September 25, 2012 — BNY Mellon Chief Economist Richard Hoey expects several more years of recuperative economic expansion, according to his most recent Economic Update.

"We doubt that U.S. fiscal policies will be dysfunctional enough to generate a recession," says Hoey.  "Fiscal tightening in 2013 should be only about 1% to 1.5% of GDP, much less severe than the fiscal policy embedded in current law," he continues.  "After the U.S. Presidential Election, a 'small bargain' appears more likely than a 'grand bargain.'"

In addressing QE3 Hoey says, "We believe QE3 will provide some net support to the U.S. economy, but the overall impact is likely to be reduced by the tendency of aggressive monetary ease to support energy prices."

"We have no doubt that the Federal Reserve has the technical tools to prevent a sustained upward shift in inflation," Hoey states. "But now that it is helping the U.S. Treasury finance persistent budget deficits and taking responsibility for mortgage interest rates, it is open to question whether the Federal Reserve will have enough political independence to utilize these tools in a timely way in future years."

Other report findings include:

OMT – In Europe, the Outright Monetary Transactions (OMT) plan of the European Central Bank (ECB) appears well-designed technically but may require skillful negotiations among the European leaders to be effectively implemented according to Hoey, due to a combination of "austerity fatigue" among voters in the peripheral countries and "support fatigue" among voters in the stronger countries.

MONETARY EASE – When real interest rates in the U.S. are negative and there are fears of dollar weakness, oil may take on some aspects of a "superior store of value money, more volatile than Treasury securities but expected to have a positive real return over time."

See http://www.bnymellon.com/foresight/update-video.html for Hoey's complete September 2012 Economic Update.

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