Asian turmoil won't spark global depression: Fed

Asian turmoil won't spark global depression: Fed

WASHINGTON (AFP): Federal Reserve board governor Laurence
Meyer said here Thursday that financial turmoil in Asia would
hold back U.S. economic growth in 1998 but would not provoke a
global depression.

Meyer, following a speech at the Economic Strategy Institute
here, said he did not see the Asian crisis as "a prelude to a
worldwide global depression."

Asked to comment on the role of the International Monetary
Fund (IMF) in Asia, Meyer said: "I believe that success in
containment requires a balance of adjustment and financing along
the lines of what the IMF is encouraging."

The IMF has launched a US$57 billion bailout of the embattled
South Korean economy and has also put together rescue packages
for Thailand and Indonesia.

But the financial turmoil is not yet over and on Thursday in
New York both Thailand and Indonesia's debt ratings were
downgraded.

Standard and Poor's rating agency said it was lowering
Thailand's sovereign rating to just one notch above junk bonds
and Indonesia's long-term foreign currency rating was downgraded
from BB-plus to BB-minus by the Euro-American bond rating firm
Fitch IBCA.

Meyer warned that only a combination of adjustments and
structural reform will restore investor confidence in the region.

"Markets punish those countries that don't seem prepared to
move ahead," Meyer said, adding there have to be "clear
commitments" on the part of the Asian countries to adhere to
their IMF programs.

In his speech to the Economic Strategy Institute he said the
Asian crisis would curb U.S. economic growth in 1998 but would
not provoke a recession.

He said the Federal Reserve's monetary policy in 1998 would be
"importantly shaped by the magnitude of the downdraft from the
Asian crisis."

He said fallout from Asia could slow U.S. growth in 1998 in
the range of between 0.5 and 0.75 of a percentage point.

Meyer said the effects of "some spontaneous slowdown and the
spillover from the Asian crisis ... should move growth closer to
a sustainable rate, rather than threaten recession."

Meyer said the strong U.S. economy in the fourth quarter that
had "tilted the balance" toward a further Fed tightening of
monetary policy had been offset by the crisis.

Any slowdown as a result of the turmoil "could be expected to
substitute for some or all of the monetary tightening that
otherwise might have been justified," he said.

Meyer said a key for monetary policy in 1998 would be whether
the economy slows to or dips below "trend growth" levels -- the
roughly 2.5 percent at which the Fed believes the economy can
grow without sparking inflationary pressures.

"A much larger spillover from the Asian crisis could encourage
an easing" of monetary policy, Meyer said. "Continued above-trend
growth and a further rise in utilization rates, on the other
hand, could encourage further tightening."