YOU ARE HERE: LAT HomeCollections

Fed's Forecast: Cooling Trend

Economy: Greenspan tells Senate panel he expects Asia's woes to have a modest--and welcome--impact on the U.S.


WASHINGTON — Federal Reserve Board Chairman Alan Greenspan said Thursday that the Asian economic crisis would probably begin to slow the U.S. economy "before spring is over," but he predicted that the impact on growth would be modest and could help reduce inflationary pressures here at home.

In testimony to the Senate Budget Committee, the Fed chairman said the U.S. economy could use a little dampening to ease mounting wage pressures. To the extent that the slump in Asia has such an effect, it "would appear to be helpful," he said.

Greenspan also endorsed President Clinton's challenge to Congress to develop a bipartisan plan by 1999 for averting a deficit in the Social Security trust fund. And he joined in warning lawmakers not to spend the projected budget surplus before it materializes.

Meanwhile, the Institute of International Finance reported that private capital flows to emerging-market countries continued strong in 1997 despite the outflow from Asia, suggesting that the crisis has been confined to that region and has not spread elsewhere.

In its annual projections, the organization of international banks predicted that the world's private investors, banks and corporations would pour about $172 billion into emerging markets this year--down from $200 billion in 1997 and a peak of $295 billion in 1996.

But it forecast that virtually the entire decline would be in the five countries most severely affected by the Asian turmoil--South Korea, Thailand, Indonesia, Malaysia and the Philippines. Capital flows to other big developing countries rose slightly in 1997 and remain strong.

Greenspan said the impact of Asia's troubles would be felt here in two ways: The slump will force Asians to cut back sharply on the volume of goods exported from the U.S. that they buy. At the same time, lower Asian currency values will make their products more competitive here.

So far, Greenspan said, the U.S. economy has "experienced only the peripheral winds of the Asia crisis."

His prediction that the drag on the U.S. economy might be welcomed reflected his growing conviction that the American economy has been expanding too rapidly, creating a tight labor market that has begun to intensify pressure for higher wages.

Although he and other top policymakers had hoped that the economy would slow on its own last year, the boom continued unabated. Greenspan said Thursday that a modest slowing provoked by the Asian crisis "may afford some breathing room from inflation pressures."

The situation has posed a dilemma for Fed policymakers. Under other circumstances, the central bank would have raised interest rates further by now to counteract wage pressures. Because of the Asian crisis, however, it has held interest rates steady so far.

Greenspan warned Thursday that the Fed would remain "vigilant" because the effects of the Asian slump would "not permanently suppress the risks inherent in tightened labor markets."

At the same time, he vowed that policymakers would be on guard to ensure that price declines do not bring on general deflation, which could create a full-fledged recession.

Greenspan said last month that he did not share some forecasters' views that the United States was headed for genuine deflation. He acknowledged Thursday, however, that it is important not to "press the disinflation process too far, too fast."

The Fed chairman's call for Congress to leave any budget surpluses intact was based partly on the fear that by ordering new tax cuts or spending programs too soon, lawmakers might "spend" the surplus before it materialized, eroding fiscal discipline.

He also suggested that lawmakers consider running a budget surplus several years in a row. That, he predicted, would push interest rates down further, spur investment and improve the nation's productivity.

While many of the lawmakers' proposals for new spending "have merit," Greenspan said, "they must be considered in the context of responsible budget strategy for the longer run. We must not allow the recent good news on the budget to lull us into letting down our guard."

Greenspan also urged lawmakers to push for early overhaul of the Social Security system. Asked when Congress should act, he replied: "Well, my immediate reaction is--like--yesterday."

The report from the Institute of International Finance shows that net private capital flows to Asian countries went from a peak of $93 billion in 1996 to an outflow of $12 billion in 1997, with a $9.4-billion outflow projected for 1998.

At the same time, the figures demonstrated that banks, which had rushed to increase lending to Asian countries in earlier years, retrenched sharply in 1997, pulling $21 billion out of the region. The institute projected that bank lending to Asia would drop by $14 billion this year.

Los Angeles Times Articles