Merrill Lynch Sees Modest Economic Gains in 1st Quarter

The U.S. economy will slide the first three months of 1988 before recovering and posting a modest gain, Merrill Lynch & Co. predicted Thursday.

Among other predictions from the financial services giant in its annual economic forecast:

* The dollar will resume its fall against other currencies, eventually trading for 120 Japanese yen and 1.5 West German marks in late 1988.

* Inflation will be “modest,” with prices rising about 5%, as they did in 1987.

* The Federal Reserve Board will ease its control of the money supply early this year in reaction to the faltering economy. It will cut its discount rate, the interest it charges banks for loans. The rate now stands at 6%.

* Overall interest rates and bond yields will fall in response to the Federal Reserve action, but by the end of the year they will start rising in response to lingering concerns over the state of the U.S. trade and government budget deficits.

* Stock prices will rebound and then slide back, Merrill Lynch predicts, with the Dow Jones industrial average closing out the year at about 2,100 after trading between 1,700 and 2,400.