SUNS  4305 Tuesday 20 October 1998


UNITED STATES: SLOWDOWN FEARED DESPITE RATE CUT

Washington, Oct 16 (IPS/Abid Aslam) -- U.S. stocks rose Friday but economic analysts worried about the possibility of a recession despite Federal Reserve Chairman Alan Greenspan cutting the key short-term interest rate for the second time in three weeks.

Greenspan's move Thursday, trimming the rate another one-quarter of a percent, was intended to ease turmoil in stock, currency and bond markets and lessen the risk of a recession in the United States next year. It surprised market analysts, who expected action at the next meeting of the U.S. Federal Reserve's rate-setting committee, in mid-November.

This was the first time since 1994 that the 'Fed', the US central bank, moved rates between the committee's regular meetings, signalling serious concern about U.S. economic prospects. It was "a
step in the right direction but a very small step," said Dean Baker, macroeconomist at the Economic Policy Institute here.

"We're still virtually guaranteed slower growth" over the next 12-18 months, Baker told IPS. In the Institute's 'best case' projection, unemployment - already up from 4.3 percent to 4.6 percent since last year - will rise to around 5.4 percent by end-1999. Some 1.3 million workers lose their jobs for every one percentage point increase in unemployment.

"Growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future," the Fed said. It also reported that production at the nation's factories, mines, and utilities fell 0.3 percent in September and was flat in the third quarter of 1998 - the worst showing since the end of the 1990-1991 recession.

Further rate cuts likely will be needed, according to economic analysts. With the Labour Department reporting no increase in consumer prices last month, there was little sign of inflation to prevent the Fed from moving again.

U.S. workers, still fighting to regain 1989 wage levels, could be hit hard by a slow-down, according to Baker. Some 13 percent of the U.S. population already live below the official poverty line of
15,000 dollars per year for a family of four. About 21 percent live perilously close to the line, earning less than 22,500 dollars.

Because U.S. wage earners have little in the way of savings, however, job losses could prove devastating even for well-paid industrial workers earning 30,000-40,000 dollars per year.

New jobs may be found, said Baker, but these likely would offer less. The median U.S. income for all families is 40,000 dollars per year; the median for two-income families is only 46,000 dollars.

Greenspan last month warned Congress that the U.S. economy was seeing "the first signs of erosion at the edges" as financial turmoil in Asia and Russia caused chaos in U.S. markets and
depressed U.S. exports. On Sept. 29, the central bank cut the 'federal funds rate', which financial institutions charge one another on overnight loans, to 5.25 percent from 5.5 percent. Wall Street appeared disappointed with the small cut, however, and Greenspan trimmed the overnight rate to five percent on Thursday. The central bank last cut rates in such quick succession in Dec. 1991. It went further this time, also reducing the 'discount rate' - paid by financial institutions when they borrow directly from one of the Federal Reserve's 12 district banks - to 4.75 percent, from five percent.

Nevertheless, the moves fall far short of what developing countries have urged: a concerted effort to stimulate the global economy by easing monetary policy across the major industrial countries.

Developing countries also would like to stimulate domestic demand by easing their own monetary stance. High interest rates mandated by the International Monetary Fund (IMF), they say, have
contributed to a severe credit crunch for local businesses, especially in Asia, while failing to attract new foreign investment.

Furthermore, according to Solomon Islands Prime Minister Bartholomew Aba'au Ulufa'alu, "while the industrial countries have the financial resources, we believe that the scope for pursuing
expansionary fiscal and monetary policies in those countries is limited because their economies are already operating at a high level of capacity utilisation...Further injection of demand in these countries is therefore not likely to be very productive," though it may provide some relief.

"On the other hand, there is a large demand deficiency in the Asian economies," he told world financial leaders here last week, speaking for his own country, Kiribati, the Federated States of
Micronesia, Samoa, and Vanuatu. "These countries need an urgent injection of demand supported by external funding to revive economic activity."

Ironically, the Fed's latest move was in response to problems much like some faced by Asian economies. U.S. financial markets have been in upheaval since mid-August, when the Russian government defaulted on some of its external debt. Investors and lenders reacted by dumping 'emerging market' holdings such as Brazilian bonds, causing a run on Latin America's largest economy. Then they began selling off U.S. securities thought to carry 'above-average' risk.

In turn, money poured into U.S. Treasury securities, pushing down yields to levels not seen in three decades. Corporate stock and bond offerings have fared poorly, forcing many firms to take out
increasingly costly bank loans - in some cases, simply to pay off existing debt rather than investing in production.

Markets seemed to rally in response to Thursday's decisions.  The Dow Jones industrial average gained more than 200 points within minutes of the announcement Thursday and rose more than another 100 points Friday. It remained to be seen whether those gains were the beginning of a sustained rally in productive investment.