Monday September 27, 11:46 am Eastern Time
Fed's Parry says may be best to delay rate hike
SAN FRANCISCO, Sept. 27 (Reuters) - With the U.S. economic outlook somewhat uncertain, the Federal Reserve may prefer to wait for inflation to rise before raising interest rates to avoid the risks of unwarranted tighter policy, San Francisco Fed President Robert Parry said on Monday.
In a speech to the National Association for Business Economics conference, Parry said the question of whether productivity growth will continue at the accelerated rate seen in the past few years is the major uncertainty in the economic outlook.
''Suppose, like now, we're uncertain about the underlying model of the economy. In that case, preemptive policy can lead to the wrong action,'' Parry said in an advance text of his speech made available to reporters.
''When there's a high degree of uncertainty about forecasts, it could be best for policy to be more cautious -- in the extreme, to wait until inflation actually starts to rise before acting to tighten. With high uncertainty about the future, a somewhat delayed action could be preferable to running the risk of tightening when it's not warranted.''
Ideally, Parry said, Fed policy should be preemptive, acting to head off inflation before it actually begins to accelerate. Fed economists maintain that inflation is easier to fight preemptively.
Though the major measures of U.S. inflation were very tame, the Fed raised rates twice in June and August amid fears that strong growth and very tight labor markets were going to drive prices higher in the future. The policy-setting Federal Open Market Committee (FOMC) meets next on Oct. 5.
Parry, who is not voting on the FOMC this year, said the economy may be in the midst of a ''productivity shock'' related to more rapid and widespread technological advances. That could allow faster growth than once was thought possible without inflation and may be rendering traditional economic indicators of inflationary pressure unreliable.
However, there are serious uncertainties about whether the recent pace of productivity growth will be sustained over the longer term. Parry said it may be a consequence rather than a cause of strong economic growth lately.
''The uncertainty about recent productivity growth appears to be the major uncertainty in the outlook for the U.S. economy and also for the conduct of monetary policy,'' Parry said. ''For policy, this uncertainty complicates the question of whether FOMC actions should be strongly preemptive or more cautious.''
He noted that many forecasters had underestimated growth substantially over the past few years
''The Fed has taken a fairly cautious approach in reacting to such indications of a higher future inflation, especially since actual inflation has been so well behaved,'' Parry said.
He added that several special factors helped keep inflation down in recent years -- the global economic crisis, a strong dollar and weak commodity prices. |
