Many Economists Say Fed Should Lower Interest Rates Gulf War Will Not Lift US out of Recession, They Agree

By David R. Francis, writer of The Christian Science Monitor | The Christian Science Monitor, January 16, 1991 | Go to article overview

Many Economists Say Fed Should Lower Interest Rates Gulf War Will Not Lift US out of Recession, They Agree


David R. Francis, writer of The Christian Science Monitor, The Christian Science Monitor


WHETHER it's war or peace in the Middle East, the United States must deal with a recession at home.

To reverse the economic decline, most economists - 62 percent of 42 economists quizzed by Blue Chip Economic Indicators (Sedona, Ariz.) - are calling for the Federal Reserve System to loosen monetary policy.

"The Federal Reserve should get every push and shove the Congress and the administration can give it to move aggressively to ease credit and lower interest rates," Robert Eisner, a Northwestern University economics professor told the Senate Committee on Labor and Human Resources last week.

Generally, economists do not see war with Iraq as a way out of the recession.

"The amount by which we could expect to get a fiscal push from a war has got to be small," says Allan Meltzer, a Carnegie-Mellon University economist.

A brief war could provide the defense industry with fresh orders for ammunition, bombs, and some other military supplies. A longer war would lengthen the demand for those supplies. But since the end of the cold war has left the US with a surplus of tanks, aircraft, and warships, any losses of such equipment probably would not be replaced.

If hostilities do break out, however, experts anticipate a period of price volatility in financial markets here and abroad. In the stock market, it will be a contest between those investors selling in alarm and those calculating on picking up a bargain. The foreign-exchange markets could see a flight to safety - to the US dollar. Moderate recession expected

If war disrupted the flow of oil from the Gulf, it could prompt a run-up in oil prices. However, the International Energy Agency, a 21-nation group of oil-importing nations, adopted an emergency plan last week to bolster oil supplies by releasing 2 million barrels a day from government reserves if war begins in the Gulf. And stocks of oil in the industrial nations are at their highest level since 1982.

Some economists say peace also could revive economic activity.

"By doubling oil prices and crushing consumer confidence, Iraq's invasion transformed an economic soft landing into a hard one or even a crash," writes Roger Brinner, chief economist of DRI/McGraw-Hill, a Lexington, Mass., consulting firm. "A pullback could promptly reverse our fortunes again."

"When the war scare is over, the recession will be over," says Michael Keran, chief economist, Prudential Insurance Company of America.

Most economists expect the recession to be moderate. Two-thirds of the economic forecasters polled by Blue Chip say the downturn will end in April, May, or June, with June being the favored month. …

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