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."