Fed’s Parry Still Wary Of Inflation But Labels Economy Extraordinary

A U.S. economy that is performing “extraordinarily” well still doesn’t allow central bankers to declare victory in the war against inflation, Robert Parry, president of the Federal Reserve Bank of San Francisco reiterated Friday.

“Like any economist, I’m a little suspicious of claims that the tide is sweeping us to some brave new world where inflation is dead and where the good times will roll on forever,” Parry said in remarks to the Northwest Taxable Bond Club.

Parry’s comments Friday were similar to those he made earlier this week in Salt Lake City. As he did in his Utah speech Tuesday, Parry Friday pointed to strong growth, low unemployment and “quiescent” inflation as reasons he says the economy is extraordinary.

Parry is a voting member of the central bank’s policy-setting Federal Open Market Committee. The FOMC, which meets again Aug. 19, hasn’t changed the overnight bank lending rate from its current level of 5.50 percent since March. The bank typically raises the rate in an effort to slow the economy and hold down the inflation rate if it sees a threat that inflation will accelerate.

U.S. inflation has stayed low in recent months because of a slowdown in employers’ benefits costs, a rising dollar, and a surge in productivity, Parry said. “It’s certainly likely that productivity is being boosted by the technological advances associated with computers and other high-tech developments,” he said.

Still, Parry added, “I think you’re going to see wages rise at a faster rate and probably a little bit of a pickup in inflation as well,” without defining a time period. Even so, he said, rising wages don’t have to force prices higher because “lower profit margins could act as a shock absorber.”

In the end, inflation remains a risk, he said. “Those who say this economy can grow without any fear of inflation at 3 plus percent year after year have a very difficult thing to prove,” Parry said.

Earlier Friday, another voting member of the FOMC, Atlanta Fed Bank President Jack Guynn, suggested he agrees with Fed Chairman Alan Greenspan that the U.S. central bank doesn’t need to rush to raise interest rates.

“Recent experience suggests that we can have low inflation, low unemployment, and strong real growth, and I think there is growing evidence that low inflation is a precondition for achieving our other economic goals,” Guynn said, speaking to the Business Development Board of Palm Beach County in Florida.

The Fed must remain on the look-out for any changes in the figures and in the forces that have held inflation down, Parry said.

At the same time, he said, “There are reasons to expect a more sustainable growth rate in the future.” The rising value of the dollar against major foreign currencies could “slow the growth of exports,” he said, while restrained federal spending will keep growth at a sustainable rate.