Fed predicts U.S. economy slowdown

Press, 25 February 1988, Page 25

Fed predicts U.S. economy slowdown

By

ALAN WHEATLEY

NZPA-Reuter Washington

The U.S. central bank has predicted that the growth rate of the country’s economy would slow to 2.0 to 2.5 per cent in 1988 from a robust 3.8 per cent in 1987.

In their six monthly report to Congress, Federal Reserve policymakers said inflation, as measured by the Gross National Product price deflator, was expected to rise in a range of 3.25 to 3.75 per cent in 1988 after a 3.0 per cent rise in 1987. The Fed’s policy-mak-ing Federal Open Market Committee also said in its report that it expected the U.S. unemployment rate, which ran at 5.8 per cent in December and January, to average 5.75 to 6.0 per cent by the end of 1988.

In testimony to the

House of Representatives Banking Committee that accompanied the report, Fed chairman, Mr Alan Greenspan, said the central bank eased the supply of credit slightly a few weeks ago because of some indications the U.S. economy was softening.

He also said markets had not yet overcome the effects of the October 19 stockmarket crash, when the Dow Jones industrial average fell 508 points. “I think it is fair to say that markets still still exhibiting a certain edginess, and we can’t be sure yet that normal market functioning has been fully restored following the events of October,” he said in a prepared testimony. The Fed’s economic forecast is in line with the Reagan Administration’s prediction that U.S. Gross National Product, the

total value of goods and services produced, will grow by 2.4 per cent this year after taking inflation into account.

The Administration originally forecast 1988 growth of 3.5 per cent but later scaled back, largely because of the October collapse in stockmarket prices.

In his testimony, Mr Greenspan said the Fed’s forecast assumed further progress would be made in reducing the federal budget deficit. He said continued fiscal restraint by the Government was crucial to redress global trade imbalances.

Increased exports were expected to spur U.S. economic growth in 1988, Mr Greenspan said, noting that U.S. producers had improved their international competitiveness significantly. And Mr Greenspan said

he did not believe a serious resurgence of inflation was in the works but warned policy-makers they must be vigilant against signs of its return.

“We cannot be complacent about the potential for higher inflation,” he told the Banking Committee of the House of Representatives.

“By the time an acceleration of costs and price pressure were to become evident, the inflation process would already be well entrenched,” he said in remarks made in conjunction with the U.S. central bank’s report.

The Fed chairman said he was comfortable with the current level of the dollar and argued that the Louvre Accord, in which the largest industrial democracies worked to stabilise currency values through co-ordinated efforts, had been a success.