Turmoil in Asia will slow the U.S. economy enough to eliminate the need for a short-term interest rate hike, a group of leading bank economists predicted Wednesday.
"We do not advise or expect a change in Federal Reserve policy," said Frederick Breimyer, chairman of the American Bankers Association's Economic Advisory Committee. "Monetary policy is just right."
Mr. Breimyer, who also is chief economist at State Street Bank and Trust Co., said the Asian crisis would trim about 75 basis points from the economy's growth rate this year.
The crisis also will cause the U.S. trade deficit to balloon to $200 billion as Asian nations dump cheap exports into the country. "We are not anticipating a quick recovery," he said. "We don't want to be unreasonably optimistic."
Overall, the economy will grow 4.3% this year. Inflation will remain tame at 2.1%, and unemployment will drop slightly, to 4.8%, the economists said.
The group, in its semiannual economic report, said commercial and industrial lending will increase 6.5%, a growth rate 300 basis points slower than last year's.
Mr. Breimyer attributed the lower business loan growth rate to the slowing economy and credit-quality warnings from regulators. "The regulators are making the point, and we are hearing the point," he said.
Consumer lending will grow 4.6% this year, 10 basis points faster than last year but still far slower than the double-digit growth rates of the early 1990s.
The ABA expects mortgage interest rates to rise gradually, increasing to 7.18% in the second quarter, 7.25% in the third quarter, and 7.26% in the fourth quarter.
Carl Tannenbaum, chief economist at LaSalle National Bank, said today's low rates are the result of a flood of Asian money into U.S. markets.
Asian economies are expected to stabilize during the year, causing some of that money to leave the United States, which would cause rates to rise modestly.
The ABA expects the fed funds rate to remain at 5.5% and the prime rate to stay at 8.5%. It also predicted that the dollar would weaken slightly against the German mark and the Japanese yen.
