November 11, 1997 in Nation/World

Asian Worries Should Keep Fed On Hold, Experts Say

Bloomberg News
 

Federal Reserve policymakers probably won’t raise borrowing costs at their meeting Wednesday, mostly because of expectations that economic troubles in Asia will help the U.S. economy to slow, analysts say.

Even after hearing that the economy created a larger-than-expected 284,000 jobs in October - as unemployment fell to a 24-year low - economists are sticking to forecasts of no change in the Fed’s target of 5.50 percent for federal funds rate on overnight loans between banks.

“The turmoil in Asia reduces growth prospects for Asia - and ripples back through the rest of the world, affecting everybody’s growth outlook,” said James Glassman, chief domestic economist at Chase Securities Inc. in New York.

For the U.S., slower growth in Asia should mean reduced exports to the region, he said.

U.S. growth was expected to slow in the fourth quarter before concerns about weakness in Southeast Asian economies erupted and weighed on stock markets from Hong Kong to the U.S. A decline in consumer purchases of autos and other retail goods was expected to limit growth to a 2.5 percent annual rate this quarter, slower than the third quarter’s 3.5 percent pace.

The Fed has another reason to be patient: tame prices. So far in 1997 U.S. inflation is nearly nonexistent, rising at a 1.8 percent annual rate as measured by the consumer price index. That’s about half of the annual gain seen in the first nine months of 1996. And it’s on track to meet or beat the 1.9 percent recorded in 1986 - the slowest annual inflation rate since 1965.

Still, there are risks to that bright inflation performance from the labor market, Fed Chairman Alan Greenspan has said. “The rate of growth in employment over recent years has been such that we have had to dig ever increasingly into a group of people who are not working but wanted a job,” he told Congress on Oct. 29. “We do, at some point, run into some pressures.”

In particular, last month’s 0.5 percent rise in average hourly earnings surpassed expectations.

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