Meyer Raises Possibility Of Rate Cut

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

“A much larger spillover from the Asian crisis could encourage an easing,” Meyer said Thursday, marking the first time a Fed official publicly mentioned cutting borrowing costs since the Fed raised the overnight bank rate by a quarter point in March 1997.

While he said he expects the recent economic turmoil in Asia to cut U.S. growth by “roughly” half a percentage point this year, Meyer said that estimate could increase if the Asian crisis deepens. That, in turn could lead to lower interest rates, he suggested in remarks to the Economic Strategy Institute.

Still, if the Asia crisis doesn’t result in the expected slowdown, the Fed might see a need to raise interest rates, Meyer said. “Continued above-trend growth and a further rise (in) utilization rates, on the other hand, could encourage further tightening,” he said.

Meyer’s comments follow those of Fed Chairman Alan Greenspan, who over the weekend broached the topic of price deflation, suggesting that the central bank might reduce interest rates sometime this year.

Asked if he sees a potential for U.S. deflation in 1998, Meyer said that by not mentioning the subject in his speech, he “gave deflation it’s appropriate attention.”

There are other signs the Fed’s next move will be to cut rates. Take gold prices. Gold was in a slump for most of last year, with decreases in the monthly average price of the metal exceeding 10 percent from 1996 levels. Since 1981, such declines have three times been accompanied by slowing growth, falling inflation, and a Fed rate cut.

Overall, a “downdraft” 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.”