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To: goldsnow who wrote (14495)	7/14/1998 8:07:00 PM
From: Alex	Read Replies (1) \| Respond to of 116759

IMF: US FED 'LIKELY' NEEDS TO RAISE RATES NEXT 3 TO 6 MONTHS --Rate Hike Would Be Needed if U.S. Economy 'Reasserts' its Strength --But a Deflationary Shock From Asia Might Prompt Fed to Ease Rates --Dollar Depreciation Can be Expected as Asia Stabilizes By Heather Scott ÿÿÿÿÿWASHINGTON (MktNews) - The Federal Reserve is "likely" to have to raise interest rates in the next few months if the U.S. economy picks up and as factors restraining inflation begin to dwindle, the International Monetary Fund said Tuesday in its annual review of the U.S. economy. ÿÿÿÿÿHowever, the IMF said the Fed might have to ease monetary policy in the face of a new deflationary shock from Asia. ÿÿÿÿÿThe IMF had high praise for U.S. fiscal and monetary policy, crediting it with achieving the "outstanding" economic performance of recent years, which will in turn contribute to the recovery of the countries impacted by the Asian crisis and "help maintain growth in the world economy." ÿÿÿÿÿThe report warned that "if the underlying strength of the U.S. economy reasserts itself, monetary policy is likely to need to be tightened at some point beyond the next three to six months." ÿÿÿÿÿThe IMF staff cautioned that given the deflationary influence of the Asian financial crisis, assessing the underlying strength of the U.S. economy "represents a key challenge for the monetary authorities in the period immediately ahead." ÿÿÿÿÿAbsent a renewed Asian shock, "labor market conditions are expected to remain tight in the United States, and the influence of factors restraining inflation is likely to wane in the period ahead" which would reduce upward pressure on the dollar and prompt a reverse in the declines in commodity prices that have helped the U.S. economy. ÿÿÿÿÿ"The authorities will also need to watch developments carefully in asset markets, especially the stock and real estate markets, and the monetary and credit aggregates, all of which have posted strong gains recently," the IMF said. ÿÿÿÿÿ"Under these circumstances, delaying a monetary policy response until there is clear evidence that inflation is on the rise would risk losing hard-won ground on inflation and inflation expectations." ÿÿÿÿÿHowever, in the event of a renewed shock from Asia or instability in world financial and currency markets which would act to slow the U.S. economy, the need for looser monetary policy "cannot be ruled out," the IMF report said. ÿÿÿÿÿThe appreciation of the U.S. dollar over the past two years, and the accompanying rise in the current account deficit, will have the short-term beneficial effect of supporting the recovery of the Asian economies hit by the crisis. But "some depreciation of the dollar can be expected" as the Asian situation stabilized, which would contribute to a narrowing of the current account deficit, the IMF predicted. ÿÿÿÿÿThe IMF said "an additional real depreciation of the dollar may be needed" if those deficits persist, but added that given the fundamentally sound U.S. macroeconomic policies "it is expected that this correction in the dollar's value will be an orderly process." ÿÿÿÿÿDespite the sound fiscal policies that have turned a deficit into a surplus expected to reach 0.5% of gross domestic product this year, the IMF said in the longer term U.S. fiscal policy should focus on the financial problems facing Social Security and Medicare, while keeping the budget in balance. ÿÿÿÿÿMedicare reform should not rely solely on increases in payroll taxes, but on a combination of other measures, which may have to be adjusted periodically even after they are implemented. ÿÿÿÿÿAnd the IMF said using a combination of small increases in contribution rates and reductions in benefits, if implemented promptly, would be enough to ensure the long-term viability of the Social Security system. Such small changes would be preferable to radical reform, the report said. ÿÿÿÿÿThe IMF staff also urged the United States to consider measures to simplify the income tax system, saying the reliance on tax incentives to promote specific objectives has made the system "increasingly complicated." ÿÿÿÿÿThe report suggested simplifying the system through measures such as modifications in the tax rates to limit the number, and lower the level, of marginal tax rates. ÿÿÿÿÿThe IMF also commended the United States for taking the lead in the effort to liberalize trade worldwide, but noted that sectors such as agriculture and textiles continue to have high barriers. ÿÿÿÿÿThe U.S. Treasury released the summary of the so-called Article IV consultation with the IMF. A spokesman for the fund said the IMF would not release its own statement on the proceedings for several weeks, but the country involved often releases the summary earlier. ÿÿÿÿÿ Market News Service Washington Bureau: (202) 371-2121 11:49 EDT 07/14 economeister.com