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To: long-gone who wrote (38818)	8/11/1999 4:14:00 PM
From: Alex	Respond to of 116764

Fed's Parry: World Econ Recovery Poses Risks for US Inflation <Picture> Aug. 11-MAR-- [B] Fed's Parry: World econ recovery poses risks for US inflation --Parry: Strong US, world demand risk inflationary buildup --Parry: Fed sees US, world demand as key to inflation outlook --Parry uncertain whether US productivity growth will continue --Parry: Too soon to tell if rise of labor costs is new trend --Parry: More fast productivity growth could keep inflation tame --Parry says lenders' risk tolerance in US more normal again --Parry says Japan "making progress" dealing with econ problems By Anne Maitrepierre, Bridge News Washington--Aug 11--Federal Reserve Bank of San Francisco President Robert Parry today warned there are risks to the US inflation outlook due to the economic recovery abroad combined with strong US consumer demand and tight labor markets. Parry also said while a continuation of the pickup in the domestic productivity growth could help keep inflation in check, it's uncertain whether the faster productivity growth is evanescent or more permanent. * * * Although weak foreign demand last year helped contain inflationary pressures in the US, "with improved prospects for recovery abroad, we can't expect this to help as much on the inflation front going forward," Parry said in prepared remarks to a women's group in San Francisco, Calif. "There are risks for future US inflation, given the improved prospects abroad, continued rapid growth in domestic demand and tight labor markets," he said. When strong domestic demand is coupled with reinvigorated demand from recovering economies abroad, "the risk of inflationary pressures begins to build," he said. Countries such as South Korea and Thailand have been leading the economic recovery in Asia following that region's 1997-98 financial crisis. Even Japan, which was having trouble extricating itself from its 8-year recession, is now showing glimmers of hope. The latest "tankan" business sentiment survey released by the Bank of Japan showed some improvement, and first quarter gross domestic product growth was much higher than anticipated. In his only direct remarks on foreign economies, Parry today noted that Japan "has been making progress on addressing its problems" while the Brazilian economy is "improving." He also said Korea's economy was no longer experiencing a recession. Parry said the Fed "has been keeping a close watch on demand" since last year, both domestically and in the internationally "because it is key to the outlook for inflation." Parry noted that, so far, "the inflation news has been favorable." Even though some labor cost indicators did "jump up recently," he conceded, "it's too soon to tell if this amounts to just a wiggle in the data that will disappear soon or the beginning of a new trend." Markets on Friday were especially rattled by the 0.5% unexpected gain in the average hourly earnings component of the US July jobs report, which confirmed fears of an ever-tight labor market. Consumer demand in the US was robust enough to lift US GDP growth to dizzying heights in the fourth quarter of 1998, Parry said. But even if US GDP growth slowed "noticeably" in the second quarter this year to 2.3%, "it was not because of weaker domestic demand," he added. Rather, a sizeable share of that slowdown is due to "a decline in inventory investment," which may have "only a temporary effect," Parry said. US consumer spending remains strong, even if the latest US government figures showed that consumer spending rose 0.3% in June, slightly below the expected 0.4% increase on less spending on autos. Parry also cautioned that the capacity of the US economy "to produce enough" to satisfy the robust domestic and global demand "could become strained." Turning to US productivity growth, Parry noted a continuation of its recent fast pace "could keep inflation in check." But uncertainties regarding whether the new fast trend in productivity is temporary or permanent, he added. "It's possible that the productivity pickup won't last very long," due to the "strong business cycle upswing" the US economy is still experiencing. However, "some evidence does seem to point to the possibility of a fundamental shift in productivity." Parry, however, emphasized, that even if the shift in productivity growth--most likely due to high-technology advances--is permanent, it "may not be fast enough to keep inflationary pressures down in the face of rapidly e xpanding demand." Parry said "strong US consumption spending may indicate that the public is confident the economy will continue to expand." He added that "the strength of the stock market" also may mirror such public confidence. Although the US stock market is up, he said lenders' tolerance for risk has now returned to "more normal levels." Parry reiterated the Fed's current leitmotiv that the central bank remains "especially alert" to developments indicating the emergence of heightened inflation or future inflationary threats. End Bridge News, Tel: (202) 662-7108 Send comments to Internet address: econ@bridge.com The Bridge ID for this story is YWQXNT (c) Copyright 1999 FWN futuresource.com