Fed's Parry Says Inflation Tame, Suggests Rates Won't Rise Soon
By Liz Enochs and Brendan Murray
San Francisco, March 28 (Bloomberg) -- Tame inflation gives U.S. central bankers room to be ``thoughtful'' about when to raise interest rates while allowing economic growth to accelerate, said Robert Parry, president of the San Francisco Federal Reserve Bank.
``We can be deliberative as we approach this issue of when policy has to change and how aggressive it has to be,'' Parry said in an interview yesterday. ``I don't think inflation shows, or indicates, that there is any imminent problem.''
The economy probably pulled out of recession in December and is likely to grow this year at a rate that exceeds the Fed's forecast of 2.5 percent to 3 percent, he said. Parry expects unemployment to fall as businesses resume hiring, which in turn will boost consumer spending.
``I'm pretty optimistic and confident that we have turned around and the economy is going to be expanding,'' he said.
Parry cited last year's series of Fed rate cuts as a reason for his forecast. Policy makers reduced the benchmark overnight lending rate 11 times to a 40-year low of 1.75 percent. In their two meetings this year, central bankers have let the rate stand.
``You can analytically reach the conclusion that monetary policy is in a position now that is completely appropriate,'' said Parry, a non-voting member of the Fed's policy-setting Open Market Committee. ``At some point in the future, we're going to have to turn the dial a bit. It's just when this process begins and how rapidly it's likely to be that is the real question mark.''
Other Fed Officials Agree
Parry is the third Federal Reserve bank president this week to say policy makers aren't in any hurry to start raising interest rates as the economy recovers from what may have been the mildest post-war recession on record.
The economy grew at a 1.7 percent rate in the final three months of last year after shrinking at a 1.3 percent pace in the third quarter and expanding at a 0.3 percent rate in the second. Since World War II, no other recession, as determined by the business cycle dating committee of the National Bureau of Economic Research, has had only one quarter of contraction.
At a financial services forum in Prague this week, bank presidents Robert McTeer of Dallas and Anthony Santomero of Philadelphia, said it was too early to start speculating on when rates will start to rise. Both are voting members of the FOMC.
``Sooner or later, as the economy gathers momentum and gets stronger, an adjustment will have to be made, but I'm in no hurry,'' McTeer said in an interview Tuesday.
Inflation in Check
One reason the Fed officials cite for their sanguine approach is tame inflation, especially the core rate of price indexes, which exclude the costs of food and energy. So far this year, the Labor Department's core consumer price index is rising at a 2.6 percent annual pace, compared with 3.7 percent through February 2001.
``I don't feel, at this point, concern about inflation is very high on the list,'' Parry said.
That means businesses are still finding it tough to raise prices, which may crimp earnings, he said. ``This turnaround in the economy also includes a highly competitive environment where inflation is relatively low and price competitiveness makes it difficult to add sharply to profits,'' Parry said.
The recession that began in March 2001 probably ended in December and was ``relatively shallow,'' he said. ``We're beginning to see pretty convincing signs that the economy is expanding.''
Economic Growth
He said he expected gross domestic product to rise at an annual rate of more than 3.5 percent in the first quarter, which ends Sunday. He didn't give a specific forecast for the year, saying ``it's a number that is certainly well above that range that we came out with at our January FOMC meeting, which was 2.5 to 3 percent.''
Consumer spending, which accounts for two-thirds of the economy, ``continues to surprise us,'' he said. Spending rose 0.4 percent in January after surging in the fourth quarter at the fastest pace since 1998.
``I don't see any reason at this point to be pessimistic about prospects for consumer spending,'' Parry said, citing this week's Conference Board confidence index, which posted the largest gain since the last recession ended in 1991.
Businesses may not be as quick as consumers to provide a boost to the economy, he said. ``The prospects seem to have improved, but it isn't at this point a slam-dunk that we're moving into a period of vigorous capital spending,'' he said.
That may explain why company executives paint a different picture of the economy than he does, he said. ``You're going to see as companies get to higher levels of capacity utilization they'll be more productive and their unit costs will be somewhat lower and the profit picture will turn around,'' probably by the end of the year, he said.
Hiring to Resume
When that happens, businesses will be more willing to hire again, which will help drive down the unemployment rate. Joblessness rose to a 6 1/2-year high of 5.8 percent in December and fell to 5.5 percent last month.
``The underlying trends in my view would be that we're probably past the peak and coming down,'' Parry said.
Rising gasoline prices may put a dent in consumer spending, he said. Crude oil prices have risen 30 percent since December, reaching a six-month high close to $26 a barrel this quarter.
That's ``certainly an unfavorable development in the sense that it will put pressures on inflation,'' Parry said. ``I think almost everyone is allocating more of their budget to gasoline at this point then they had to several weeks ago.''
Home sales, which usually decline in an economic downturn, remained surprisingly strong this time, he said. U.S. consumers bought a record 6.15 million new and existing homes in 2001.
Housing is ``worth watching because it's been so strong and it's conceivable that we will reach a point where the strength of housing is not going to be the same as it has been,'' Parry said. ``Of course, if the economy continues to expand and jobs become more plentiful and people earning more money, maybe housing is going to stay pretty strong.'' |
