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IMF Warns of Danger if U.S. Economic
Growth Overheats
Reuters
Sunday, December 21, 1997; Page A12
The U.S. economy is growing at an unsustainable rate and
Federal Reserve policymakers may need to raise interest rates in
the near future to cool it off, the International Monetary Fund said
yesterday in a report.
In its interim "World Economic Outlook," the IMF said there was
little reason to expect growth in the U.S. economy, now in the
seventh year of an expansion, to slow significantly, even with a
financial crisis in Asia.
Interest rates would have to be raised if growth did "not slow to a
sustainable pace," the report said. The IMF expects the U.S.
economy to expand by 2.4 percent next year after output grew by
an estimated 3.5 percent in 1997.
"If it were not for the weakness in Asia and its expected effect on
the U.S. economy, [because] what has clearly been an
unsustainable path over the past one and a half years, the Fed
would have tightened in November and December," IMF chief
economist Michael Mussa said at a news conference. "That
would have been reasonable and prudent."
The U.S. central bank has left interest rates unchanged since
March, when it bumped up the key overnight Fed funds rate by a
quarter percentage point to 5.5 percent. It has since resisted
raising rates because of expectations of a slowdown in growth
and the apparent lack of strong inflation pressures.
For now, the IMF acknowledged that the Fed's policy was
appropriate, saying higher interest rates would risk unsettling
already jittery global financial markets even more. The rate
outlook for next year, however, depends on the extent to which
the turmoil in Asia affects the buoyant U.S. economy.
The international community already has put up more than $100
billion in emergency aid for South Korea, Indonesia and Thailand.
Lower demand from Asia is expected to put a lid on U.S. exports
while also keeping inflation in check, as producers from the region
slash prices of goods they sell to the United States in a bid to
gain market share.
If the turmoil in the region worsens, the IMF said, policymakers in
North America and Europe may have to lower rates to prevent the
situation from spiraling out of control. "In such a scenario, there
could be a need for timely monetary easing to arrest an
escalating downturn," the report said.
The key risk for growth in the major developed nations, including
the United States, was a worsening of financial problems
besetting Japan, the world's No. 2 economy, the report said. "The
key near-term risk for the advanced economies involves a
possible intensification of the slowdown in Japan," the report said.
The IMF forecast U.S. unemployment, currently at a 24-year low
of 4.6 percent, would rise to 5.2 percent next year from an
estimated 5 percent for 1997. Consumer prices are forecast to
rise 2.6 percent in 1998 after 2.4 percent this year.
The fund added it expected the nation's current account deficit to
rise to $230 billion next year from $178 billion this year as private
investors, spooked by the financial turmoil in Asia, invest more
capital in the safety of U.S. markets.
c Copyright 1997 The Washington Post Company
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