Industrial nations don't plan rate cut, Greenspan says Fed chairman says no multilateral, unilateral action is imminent

Economy

September 17, 1998|By BLOOMBERG NEWS

WASHINGTON -- Central banks in the world's leading industrial nations aren't planning coordinated interest-rate cuts to help combat a global economic slowdown, Federal Reserve Board Chairman Alan Greenspan told the House Banking Committee yesterday.

"I can safely say that at the moment there is no endeavor to coordinate interest-rate cuts," Greenspan said.

Greenspan suggested there's been some "erosion" in the U.S. economy. However, contrary to expectations, he offered no suggestion that growth is slowing enough to require a unilateral cut in the overnight bank lending rate, which Fed policy-makers have held at 5.50 percent for 18 months.

"He's saying they are acutely aware of what's happening. But he doesn't think at this particular point there is enough to cut rates," said Joel Naroff, chief bank economist at First Union Corp. in Philadelphia.

Treasury Secretary Robert Rubin, who also testified at the congressional hearing, said it's "premature" to comment on whether the United States and other members of the Group of Seven leading industrial nations are putting together a package of loans to help Brazil.

Interest rates were pushed as high as 40 percent this week in an attempt to slow capital flight from South America's largest economy and avoid a devaluation of Brazil's currency.

"What happens in Brazil is obviously very important to the rest of Latin America," Rubin said. Still, he said "it is probably premature to comment on the specifics, other than to say it has been of intense focus." Brazilian stocks fell after those comments. Brazil's benchmark stock index, the Bovespa, fell more than 145 points, or 2.11 percent.

Greenspan's comments initially pushed U.S. stocks lower. The Dow Jones Industrial Average, however, rallied after President Clinton declined to answer a news conference question about whether he might resign. The Dow closed up 65 points, or 0.81 percent, at 8,089.78.

Bonds also rose, with the benchmark 30-year Treasury bond up 0.5, pushing its yield down 3 basis points to 5.22 percent on hopes the slowing economy will eventually bring about a Fed rate cut.

"The symptoms that have caused the global economy to slow are at our shores," said James Welch, who helps manage $7 billion at Back Bay Advisors LP.

Rubin said that while the U.S. economy remains strong, exports to Asia are falling and corporate profits are under pressure.

Now there is a "risk of additional impact" as the effects of the crisis are felt in Latin America, he said.

The Treasury secretary said Japan holds the key to a global recovery and he called on the Asian nation to provide "swift, strong fiscal action" to stimulate growth. Such moves are "crucially important to global growth and stability," Rubin said. He added that other members of the Group of Seven industrialized nations are holding regular consultations about the need for Japan to act quickly.

Greenspan also prodded Japanese leaders to act. "What they need, as they fully understand, is to effectively clean out the non-performing loans and replace them with taxpayer funds," Greenspan said. "They don't need money from the IMF, from us, from anybody else."

Rubin also issued his strongest warning to date in pushing for congressional approval of the Clinton administration's request for $17.9 billion in additional funding for the International Monetary Fund.

"Every day that Congress does not approve the president's request for IMF funding increases our vulnerability to a crisis and decreases confidence in global markets," Rubin said.

Pub Date: 9/17/98

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