Fed Strives For Price Stability

Price stability, not full employment, is the Federal Reserve Bank’s primary responsibility, the president of the San Francisco Branch said Thursday.

Robert Parry told Spokane-area bankers that steps taken to tighten the money supply between February 1994 and February 1995, while painful, had contained inflation before surging economic activity let prices get out of control.

The central bank’s success allowed officials to ease back somewhat in July, Parry said.

“As a result of this slowing, the threat of inflation has been reduced somewhat,” he said.

He predicted the economy will reach a stable growth rate heading into next year of about 2 percent, down from 5 percent at the height of the expansion in 1994 but enough to sustain relatively full employment.

Parry characterized monetary policy - the Fed’s regulation of the money supply - as a blunt instrument ill-suited to correcting regional economic ills.

For example, he said, there is little the bank or its San Francisco branch can do to stimulate a struggling economy in Hawaii.

Directors of the Fed’s regional branches who vote on interest rates signal their needs to the central bank. The directors, he added, are not just bankers, they are businessmen and consumers as well.

But Parry said fiscal policy - budget decisions made by Congress, the president and the states - is the best tool for addressing the special needs of regions or states.

On other matters, Parry said:

Suggestions the Fed lower interest rates in concert with efforts to reduce the budget deficit are premature.

“We’d better see that the actions are taken before monetary policy responds.”

European nations will have to surrender some of their monetary freedom if they want a common currency.

A central bank there will have the same difficulty responding to economic conditions in one country that the Fed would have dealing with those in one state.

, DataTimes