Chairman Greenspan must ignore the former two conditions and, mistakenly, maintain a tight grip on the federal funds rate and the money supply. There is no doubt that the Asia crisis will slow US net exports and economic growth in 1998. We estimate the overall impact of the Asia crisis on US growth at only 0.4 percentage points. Meanwhile, the fundamentals point to continued healthy expansion of domestic demand. Income growth is strong, reflecting above-average job growth and higher wages.
Consumer confidence is near an all-time high.
Mortgage rates are low, providing stimulus to the housing market. On balance, GDP is expected to slow in 1998, but only to a slightly below-potential pace. As a result, labour markets will remain tight for a couple of years. In this environment, wage pressures are likely to mount, forcing companies to lift prices to preserve profit margins. Thus, the prices of most goods and services are likely to rise faster, not fall, in the years ahead.