The Economy:

The median forecast called for gross domestic product (GDP) to rise 2.8 percent in 2010 on a year-over-year basis, and 2.6 percent on a fourth-quarter-to-fourth quarter basis. Full-year 2010 nonfarm payroll employment gains were estimated to total 1.1 million jobs. While estimates for 2011 ranged widely, the median expectation was for a somewhat stronger 1.9 million jobs. Survey respondents expect the full-year average unemployment rate to be 9.6 percent in 2010, which will decline slightly to the 9.2 percent in 2011.

The future course of inflation remains a highly debated topic, but 85 percent of respondents did not believe it to be a concern in 2011. The respondents were unconcerned with the Fed continuing to expand its balance sheet, one noting, “Monetary transmission is impaired and financial headwinds nullify [Fed] accommodation.”

Fiscal Deficit:

While the respondents unanimously feel that deficit reduction will lead to a successful long-term U.S. economy, they differ as to when the deficit should beaddressed. Growth could be at risk if too many changes to fiscal policy were made while the economy was still weak. However, if a plan for reduction is not soon addressed the structural imbalances would cause harm to a medium or long-term economy.

The Roundtable noted that not doing enough to reduce deficits would result in higher interest rates and persistently slower growth. If the U.S. does not fix the deficit issue and address the long-term imbalance between mandatory outlays and revenues, the future financial situation will be similar to that in Europe.

Monetary Policy:

Respondents were asked both conventional and unconventional questions regarding monetary policy. The FOMC’s decision-making process was driven by the recovery of core inflation, job creation, and unemployment rates.

On November 3, 2010, the FOMC announced it would expand its holdings of securities through a second round of quantitative easing, called “QE2.” With two main goals, “QE2” would promote a stronger pace of economic recovery and help ensure inflation at a level consistent with the Fed’s mandate. The FOMC will continue to reinvest principal payments from its securities holdings, and intends to purchase about $75 billion per month until the second quarter of 2011. In addition, while unanimous in their decision that there would be no impact on inflation, 75 percent of respondents did predict a negative impact on the U.S. dollar.

Interest Rates:

Survey participants were again unanimous in their opinion that the FOMC will not change its current 0.0 to 0.25 percent target Fed funds rate at this week’s meeting. By the end of the survey period, December 1, the 10-year U.S. Treasury yield was 2.97 percent, up from the 2.41 percent low in 2010 in early October. Over half of the survey respondents expected the Treasury yield curve to steepen between now and end-June 2011. Also, the majority of respondents expected investment-grade credit spreads and high-yield credit spreads to continue to narrow over the next six months.

Financial Regulatory Reform:

Although the Roundtable had a wide range in opinions concerning the Dodd Frank Wall Street Reform and Consumer Protections act (Dodd-Frank Act), the consensus was that the Act would contribute to slower consumer credit growth, which could have a small negative effect for overall growth. However, they viewed the act as leading to “stronger financial institutions” and “more stability” in the long-term.

Large room for interpretation is a major concern regarding the Act. If implemented incorrectly, system risk regulations, capital standards, and securitization and risk retention could put the economy at risk. Regulatory uncertainty overall was believed to have had a negative impact on the U.S. economic growth over the last six months.

The report also includes forecasts concerning economic growth, employment outlook, and oil prices, among other issues.

About the Report

A semiannual survey of SIFMA’s Economic Advisory Roundtable concerning the U.S. economic outlook and rates forecasts.

Credits

SIFMA

• Staff Advisor: Kyle Brandon

SIFMA Economic Advisory Roundtable 2010

• Chair: John Silvia, Wells Fargo