IMF Reports U.S. Economy in Danger of Overheating
<Picture>9.01 a.m. ET (1401 GMT) December 21, 1997
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Yun Jai-hyoung/APThe international community has put up more than $100 billion in emergency help for South Korea, Indonesia and Thailand, producing critics
WASHINGTON - The U.S. economy is growing at an unsustainable rate and Federal Reserve policy makers may be forced to raise interest rates in the near future to cool it off, the International Monetary Fund (IMF) said Saturday.
In its interim World Economic Outlook, the fund said there was little reason to expect growth in the world's top economy, now in the seventh year of an unbroken expansion, to slow significantly despite a raging 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 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 told a news conference to present the report. "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 from raising rates amid the expectation of a slowdown in growth and the apparent lack of strong inflation pressures.
For now, the IMF acknowledged that was the right policy, saying higher interest rates at this point risked unsettling already jittery global financial markets even more. The rate outlook for next year, however, depended on the extent to which the turmoil in Asia would affect the buoyant U.S. economy.
Already, the international community has put up more than $100 billion in emergency help for South Korea, Indonesia and Thailand, the hardest-hit of the former "Asian tigers".
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 worsened, the IMF said policy makers in North America and Europe may actually 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," it said.
The report noted that 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 number-two economy.
"The key near-term risk for the advanced economies involves a possible intensification of the slowdown in Japan," it said.
The IMF forecast U.S. unemployment, currently at a 24-year low of 4.6 percent, would grow to 5.2 percent next year from an estimated 5.0 percent for 1997. Consumer prices are expected 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, scared by the financial turmoil in Asia, invest more capital in the safety of U.S. markets. |
