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To: Enigma who wrote (52352)	5/5/2000 6:20:00 AM
From: Rarebird	Read Replies (1) \| Respond to of 116896

Fed's Parry Sees Inflation Threat SEATTLE (Reuters) - Federal Reserve Bank of San Francisco President Robert Parry said on Thursday it would be risky for the U.S. central bank not to act on various inflation threats, but it should do so cautiously. In a speech prepared for the Seattle Society of Financial Analysts, Parry suggested he wanted the Fed to stick to its course of gradual rate rises to slow the breakneck pace of U.S. spending and ease inflationary pressures. ``Now, with all these inflationary threats, what's a reasonable course for the Fed to follow? Well it's risky just to sit back and wait for an upward trend in inflation to show up before we do something,'' Parry said. ``At the same time, we need to proceed with some caution, because there's a fair bit of uncertainty about the economy's behavior right now,'' he added. Wall Street expects the policy-setting Federal Open Market Committee (FOMC) to raise the key federal funds rate on overnight bank lending -- which now stands at 6.0 percent -- by at least a quarter of a percentage point at its next policy-setting meeting on May 16. But as evidence grows that the five quarter-point rate hikes made by the Fed since June 1999 have not slowed the economy as inflation seems to be picking up, there is a debate raging about whether the Fed might opt for a more aggressive half-point rate hike this time around. Parry, who is a voting member of the Fed's policymaking Federal Open Market Committee this year, argued for cautious policy moves given that there remains some uncertainty about the long-term inflation trend. A recent pickup in the core inflation rate, which excludes food and energy prices and rose by 0.4 percent in March, is ''worrisome'' but not conclusive, he said. ``Frankly, it's too soon to tell if this is the beginning of a more sustained upward movement,'' the Fed official said. Though many, including Parry, have been forecasting a sustained rise in core inflation for years, he said it has not happened yet. Inflation has remained ``pretty tame'', he added. ``Given these considerations, I think the cautious approach of gradually increasing short-term interest rates over the past nine months has been appropriate,'' he said. Listing a number of inflation threats, Parry said the recent pickup in core inflation may be a sign higher energy prices are starting to spill over into broader price pressures. Another threat is emerging from the tight jobs market in the form of wage pressures. Parry saw a ``noticeable jump'' in first quarter labor costs as broadly measured by the government's Employment Cost Index (ECI). The latest ECI report showed that the costs of wages and benefits for employers rose at a 4.3 percent year-over-year rate in the first quarter of 2000 as unemployment hovered near 30-year lows. Another inflation risk comes from the ``phenomenal pace'' of consumer and business spending, which accelerated in the first quarter. At the same time, demand from recovering economies overseas was picking up, adding to inflation pressures, he said. ``Consumer spending especially appears to have been fueled by the very large increases in equity values in recent years,'' Parry said. ``Now that doesn't mean that the Fed has set its sights on some kind of goal for the stock market.'' One force that has helped keep inflation in check was the increasing productivity of workers. But Parry said the United States cannot count on productivity to keep accelerating fast enough to push inflation lower. If productivity gains level off, monetary policy must respond to keep inflation low, Parry said.