OECD predicts Fed will soon raise short-term rates

November 19, 1993|By New York Times News Service

WASHINGTON -- The Organization for Economic Cooperation and Development predicted yesterday that the Federal Reserve would soon push up short-term interest rates because of concerns that the inflation rate had stopped falling.

The Paris-based organization, which promotes economic cooperation among its 24 member nations, said in a new study that "there is good reason to expect inflation to remain below 3 percent." But it added that with short-term rates so low, unemployment edging down and factory utilization rising, monetary tightening could be justified to head off a resurgence of inflation.

In its annual grading of the United States' economic performance, the organization -- which normally takes a tough stance on inflation -- added that "tightening could also be justified if" inflationary "expectations need a jolt and the Federal Reserve's credibility is endangered."

Peter Jarrett, the economist who wrote the study, said in an interview that if the Fed decided to raise short-term rates, that should not in turn push up long-term interest rates, because the Fed would be showing its determination to keep inflation low.

The OECD expressed concern that "real" short-term interest rates -- actual interest rates minus the inflation rate -- were 0 percent. Mr. Jarrett said rates at that level were highly stimulative and could ultimately reignite inflation.

Fed officials declined yesterday to respond to the report.

In what was probably the most pointed section of its report, the organization criticized the Clinton administration's efforts to pressure Japan to open its markets and agree to specific targets for reducing its trade surplus and increasing imports.

The report said that this approach ran the risk of creating managed trade, and might even result in the "cartelization" of Japanese markets.

"Sectoral quantitative targets, if adopted, might risk a bureaucratization of trade," the report said.

It also questioned the usefulness of Washington's pressure campaign, saying that even if the Clinton administration succeeded in persuading Japan to reduce trade barriers, this was unlikely to do much to reduce the U.S. trade deficit with Japan.

SG Mr. Jarrett said the Clinton administration challenged this part of

the report more than any other. Administration officials have argued that efforts to press Japan to increase imports promotes freer trade, rather than managed trade.

Each year, the OECD's secretariat issues a report that assesses the economic policies and problems of each member nation and also makes an economic forecast for each.

The study forecast a slight rise in U.S. economic growth, to a moderate 3 percent next year, with an increase in the trade deficit and another moderate drop in the unemployment rate, currently 6.8 percent.

The organization was less sanguine about long-term growth prospects, saying the nation's potential growth rate is a lackluster 2.3 percent, meaning that if it grows faster than that, inflation would pick up.

In another piece of bad news, the report said that because of slow productivity growth, the United States would lose its worldwide lead in productivity per worker within a decade. It suggested that by some measures the Netherlands may have already surpassed the United States in output per hour.

Probably the biggest problem facing the United States in the long term, the OECD said, was inadequate savings.

This holds back the nation's ability to increase educational skills and expand plants and equipment, in turn inhibiting growth in productivity and living standards.

The OECD asserted that using tax incentives to increase household savings had largely failed. It said the most effective way to rein in consumption and increase savings would be to cut the federal budget deficit.

After years of criticizing the United States for not tackling its budget deficit, the organization praised President Clinton's deficit-reduction efforts, but suggested that a new round of cuts might be required by 1998.

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