Top IMF official bearish on US financial assets
US shares may need long correction - IMF's Mussa
WASHINGTON, Feb 24 (Reuters) - U.S. shares are probably more sharply overvalued
than in 1987 and they may need a larger and more prolonged correction than took place
then, a senior International Monetary Fund official said Thursday.
But Michael Mussa, the IMF's chief economist, said in testimony to a congressional
commission that monetary and fiscal policy should be able to avert the risk of major
economic disruption from any share price drop.
He said he expected the dollar to decline, perhaps even before the Federal Reserve finished its current round of interest rate increases --
the Fed has raised rates four times since June and is expected to continue on that path.
``Once it becomes clear that the Federal Reserve has done enough to curb potential overheating risks for the U.S. economy -- and
perhaps before -- I suspect that we will begin to see some downward correction of the dollar,' Mussa said.
Mussa is a key author of the IMF's twice yearly World Economic Outlook, which assesses the economic risks and prospects facing
IMF member states.
The fund, which last October forecast world growth of 3.5 percent this year, has long been warning about rapid U.S. growth and
problems from high stock price valuations here.
``When the U.S. stock market crashed in 1987, it posed an immediate threat of broader market collapse and potentially of deep
recession,' Mussa said, referring to the market crash of October 1987, when the closely watched Dow Jones industrial average dropped
25 percent in a single day.
``Monetary policy responded promptly and aggressively to avoid market meltdown, and the U.S. economy felt only a mild one-quarter
(point) impact on growth.'
He added: ``On this occasion, the market overvaluation may be greater and a larger and more prolonged correction may be appropriate.
However, judicious use of monetary and perhaps fiscal policy should be able to avert major economic disruption -- although not
necessarily all risk of recession.'
The Dow has fallen more than 10 percent this year. But the Nasdaq index, which includes many technology stocks, hit record highs this
week before slipping back.
Mussa said the U.S. current account deficit needed to narrow significantly, something which would need slower domestic demand in
the United States and faster demand elsewhere in the world.
``It seems likely that the U.S. dollar will need to adjust downward on a real multilateral effective basis and will need to adjust downward
bilaterally against the yen and the euro over the medium term,' Mussa said.
``In the case of the yen...the persistent weakness of private demand growth in Japan argues that further near-term strengthening of the
yen would be counterproductive from the standpoint of securing sustainable recovery in that country.'
But Mussa said the recent weakness of the euro, Europe's single currency, was less well justified by economic fundamentals.
``Strengthening of growth and growth prospects in the euro area, along with some evidence of slowing growth in the United States,
should be expected to contribute to reversal of the depreciation of the euro that has occurred since its inauguration in January 1999,' he
said. |
