PSA panel forecasts upturn in prices and milder growth.

WASHINGTON -- The U.S. economy will probably expand at a slower pace next year while inflation turns up a notch, according to an economic advisory panel of the Public Securities Association.

The 11-member panel of economists from major dealers and banks predicted that next year real gross domestic product will grow 2.5%, which would be a slowdown from the estimated gain of 3.8% this year.

But the economists said they expect inflation as measured by the consumer price index to increase 3.6% next year, up from an estimated rise of 2.8% in 1994.

Panel members said they expect the Federal Reserve to tighten credit by at least another 50 basis points to 6% as officials respond to continued strong growth and inflationary pressures during the first half of the year.

On interest rates, the median forecast is for three-month Treasury bills of 6.6% in June, 1995, a rate that is expected to hold for the remainder of the year. The median forecast on the Treasury 30-year long bond is 7.8% at year-end, but "individual views were fairly widely dispersed around this rate," a PSA press release said.

The committee's members said they expect the federal budget deficit to continue to narrow next year and recommended that any broad tax cuts be accompanied by comparable spending cuts. Any such cuts are likely to require reductions in federal entitlement outlays such as Social Security and Medicare, the group said.

The economists also warned that any budget cuts "could prove illusory" if they were replaced by unfunded mandates for state and local governments.

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