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To: Alex who wrote (2472)	10/25/1997 7:33:00 PM
From: Alex	Respond to of 116892

Greenspan in a box......... Washington: Officials on new state of alert SATURDAY OCTOBER 25 1997 By Gerard Baker in Washington As world financial markets tumbled this week, officials in Washington moved into a new phase of alert, anxiously considering the policy implications of the spreading Asian crisis. At the heart of the world's largest economy, with the most open and liquid financial markets, the US authorities are forced to take a global perspective; the smallest change in interest rates by the Federal Reserve reverberates across the globe; a casual remark by an official can move markets everywhere. Usually the demands of international and domestic policy happily coincide, but the current crisis may prove to be one of those unfortunate occasions when they diverge, creating special difficulties for the Fed and its chairman, Alan Greenspan. Two principal concerns will preoccupy the Fed over the next few weeks: what impact will the global problems have on the US economy, and, in an atmosphere of heightened nervousness, what impact will Fed policy have on global markets? The setback in Hong Kong and the impetus that has given to the region's slide, has raised the potential damage to the US. If there is a sharp reduction in economic growth in Asia, as some US economists believe is increasingly likely, US exporters will suffer. One third of all US exports go to member countries of the Association of South East Asian Nations ( Asean ) . The likelihood is that the large US current account deficit will quickly grow even larger. That will increase the US dependence on inward capital flows to finance the deficit, raising the vulnerability of US financial markets to a sudden shock. In addition, the systemic risk of contagion spreading to American markets from Asian financial markets is large enough to promote concern in Washington. Both these factors suggest the Fed may need to take an accommodating approach to policy for the time being. But this is the nub of the central bank's dilemma. It is impossible to know whether these effects will seriously damage the US economy and financial system. But what is certain is that the US economy has been growing, strongly, almost certainly too strongly for the Fed's liking. Mr Greenspan's recent utterances have suggested the Fed has been positioning for an early tightening of monetary policy. The headlong rush by investors into US Treasury bonds this week, which has lowered long-term interest rates to 6.3 per cent, will only add fuel to the flames of strong demand. If the central bank takes the view that demand will remain strong, it may wish to raise rates as soon as November 12, when its open market committee next meets. But this move could itself precipitate a full-blown financial crisis - not just in the US, but around the world. "Much depends on how the Federal Reserve views the economic situation in south-east Asia, its risk to the United States, and the possibility of systemic risk," says Allen Sinai, chief economist with Primark Decision Economics in New York. The best the US authorities can hope for is that the immediate storm will blow over, allowing the Fed to pursue the policies that are best suited to the long-term needs of the US economy.