He said that "the impact of this situation will be manageable and the spillover effects will be reasonably moderate."
Excerpts from a lengthy article:
Federal Reserve Bank President Alfred Broaddus said Wednesday that the Asian financial crisis has made the upside and downside risks to the economy "more equally balanced," but indicated he still thinks the upside risks predominate...
"The reflow of internationally mobile capital into U.S. dollar assets due to the problems in Asian markets and the fear they may spread to other emerging markets, may be holding U.S. long-term interest rates down and preventing the natural market-induced rate increases from playing the healthy restraining role they normally play when the economy is booming as it appears to be doing now,"
Asked whether the flat-to-inverted yield curve might not portend a weakening of the economy as has been the historical pattern, Broaddus indicated that he thought this was not likely currently because of special circumstances. Unlike the past when inverted yield curves have resulted from Fed tightening or economic weakening, he said that the current flattening of the yield curve appears to reflect largely foreign capital inflows and diminished inflation expectations..
On the upside Broaddus said the economy is entering 1998 "with a lot of momentum ... . In this situation and with the economy already operating at a very high level in relation to capacity, especially in labor markets, and with another round of mortgage refinancing currently freeing up additional spending balances, there is clearly a risk the economy may overheat at some point. That in turn could produce rising inflation, rising interest rates and another boom-bust scenario," he said.
On the downside, Broaddus said the Asian crisis should subtract a half percent or more from growth. He said high debt burdens could constrain consumer spending. He said he does not agree with those who "expect the stock market reaction to rising labor costs and reduced earnings to produce a much larger-than-anticipated market correction in 1998."
...Broaddus said that strong growth in and of itself need not be inflationary, "but if we at the Fed continue to support this above-trend real growth with above-target money supplygrowth, inflationary pressures could begin to increase this year and we could get the boom-bust sequence that has ended so many previous post-World War II business expansions."
... He added, "I don't see any significant risk of deflation." He said deflation, actual falling prices, would have to be a "monetary phenomenon," and noted that the money supply has been growing above target, not declining.
... A member of the audience asserted that the ongoing difficulties in Southeast Asian nations are much more serious than those that afflicted Mexico and its Latin American neighbors a few years ago. Broaddus acknowledged the two situations are different but said he was not prepared to make a judgment that the current crisis is worse. In fact, he said, unlike various Latin American nations, the Asian countries do not have a "credibility problem" with their monetary policies. What's more, he said, the Asian nations are "inherently strong" despite their "structural problems."
He said the "underlying situation" in Asia is that the nations of that region have "enormous resources and huge capital" that make him skeptical of the "doomsday scenarios" proffered about the Asian outlook.
He said that "the impact of this situation will be manageable and the spillover effects will be reasonably moderate."
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