Swonk said that unlike the Gulf War, when the economy already was sliding into recession, a war now likely would stimulate the economy in the short term. However, she said, it is unclear what impact a war, with its attendant increase in defense spending, would do to the economy in the long term.
"Risks abound," Swonk wrote in her monthly analysis of economic developments. "Uncertainties are likely to continue to weigh on financial markets and senior managers trying to plan for the future until a clear outcome is achieved. In other words, markets will be skeptical about the fate of oil prices and stability within the region until investors see the 'regime change' that is sought by the administration."
Swonk noted the economy accelerated during the summer, with government spending the only drag on growth. She said real gross domestic product is expected to rise more than 4 percent in the third quarter, a sharp increase over the 1.3 percent pace of the second quarter. Prospects for fourth-quarter growth are less optimistic, largely due to disruptions caused by the West Coast dockworkers strike.
As for monetary policy, Swonk said a further reduction in interest rates by the Federal Reserve Board cannot be ruled out before the end of the year.
Swonk said that although oil prices likely will spike with an attack on Iraq, the long-term outlook is for a downtrend.
"World oil capacity remains in excess, with both the Russians and Saudis eager to pump," Swonk wrote. "Indeed, if OPEC (the Organization of Petroleum Exporting Countries) delivers 4 (million) to 5 million additional barrels a day, as promised, oil inventories will rise much faster than they can be consumed."
Swonk said she expects the administration to act if oil prices stay high for an extended period, likely implementing a tax cut to offset the increases.
Swonk discounted the threat of further terrorist attacks as a factor, saying the threat exists "whether we move on Iraq or not."
An attack on Iraq will not destroy Islamic extremism, she cautioned.
"More than 40 percent of the Muslim population worldwide is under the age of 15 and largely without means of support. Roll into that mix the dominance of men over women in those societies and it is hard to imagine a period of long-term stability.
"Any conflict we have with Iraq will likely mark the continuation of problems in the Middle East rather than a conclusion to them."
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