Crisis could cause rate cut, Fed governor says No slowdown due to Asia might lead to rate rise

Central bank

January 09, 1998|By BLOOMBERG NEWS

WASHINGTON -- U.S. Federal Reserve policy-makers may decide to cut the overnight bank lending rate if Asia's economic crisis slows the U.S. economy more than currently expected, Federal Reserve Gov. Laurence Meyer said yesterday.

While he said he expects the recent economic turmoil in Asia to cut U.S. growth by "roughly" half a percentage point this year, that estimate could increase if the Asian situation intensifies, and XTC lead to lower interest rates, he suggested. If, on the other hand, the Asian crisis doesn't result in the expected slowdown, the Fed might see a need to raise interest rates, he said.

"A much larger spillover from the Asian crisis could encourage an easing," Meyer said, in remarks to the Economic Strategy Institute.

Overall, a "down draft" from Asia's economic turmoil should push U.S. growth to a more "sustainable rate" this year, Meyer said. "Spillover from Asia will importantly shape the U.S. outlook for 1998," he said. "A slowdown of such a magnitude could be expected to substitute for some or all of the monetary tightening that otherwise might have been justified."

Specifically, he said, U.S. growth "is likely to slow over 1998 and inflation may rise somewhat, but remain modest. However, a slowing in growth appears to be a higher probability than an increase in inflation." In the fourth quarter of 1997, the economy probably grew at an annual rate of 3 percent or more, he said.

In addition, he said, there are "few imbalances in the U.S. economy that would appear to be threats to the expansion."

Nevertheless, the Fed is keeping a close watch on recent signs )) of strength in the labor market, particularly wages, he said. "I expect upward pressure on wages from the prevailing tightness in the labor market," Meyer said.

Labor costs will rise as a "sharp cyclical slowing in productivity" serves to "undermine profit growth," he said.

Meyer is a voting member of the U.S. central bank's Federal Open Market Committee, which sets interest rate policy. Fed policy-makers, who meet next Feb. 3-4, have left the overnight bank lending rate at 5.50 percent since raising it by a quarter-point last March.

Pub Date: 1/09/98

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