26 April 2001, 21:01 Fed "will continue to be especially alert in monitoring economic developments."
WASHINGTON (MktNews) - San Francisco Federal Reserve Bank President
Robert Parry said Thursday that the Fed "will continue to be especially
alert in monitoring economic developments."
Parry, in remarks prepared for the University of California at
Santa Barbara, anticipated faster growth by the second half, but not up
to the economy's enhanced growth potential, with the result that
unemployment will continue to rise.
For now, he said, the economy is "in a period of very slow growth,
not an outright recession," and the road ahead is "rocky."
Parry said that stock prices do not drive monetary policy, but said
the Fed has to take them into account because of the effects of lower
stock values on demand. He said "spending by both consumers and
businesses has been squeezed" by the decline in stock prices.
While consumers have been hit by a "negative wealth effect,"
businesses face a "higher cost of capital" that "has led them to cut
back on investment -- especially in the high-tech area."
Parry added that the previous period of "extraordinarily strong"
business investment resulted in an "overhang of business equipment and
software that could spell weakness in business spending for a time."
New technology is "intensifying the slowdown," but should also
"help the economy to adjust more quickly," to the extent that firms use
technology to manage their inventories.
In California, Parry said "manufacturers of high-tech products
are going through a process of adjustment, with many curbing
investment plans and reducing payrolls," and he said "slowing in the
technology sector has begun to spill over to other sectors of the
economy."
By increasing productivity, technological innovation has
increased the economy's noninflationary growth potential, said Parry,
but this means that when the economy grows below its potential higher
joblessness can result. "Growing at a slower, but still positive,
rate today is likely to push up unemployment rates about as much as
small contractions have done in past business cycles."
Parry voiced conditional optimism about the outlook. "By the
latter half of this year, it seems likely that we'll see somewhat
faster growth -- not up to our full potential, perhaps -- but at a
more respectable rate," he said, adding, "No doubt, the road now and
immediately ahead may be rocky, given the fact that there are some
downside risks."
Parry said "further sizable declines in the stock market or
consumer or business confidence could further dampen demand." He
reiterated the Fed's statement last Wednesday, accompanying its
fourth 50 basis point rate cut, that "the risks do seem to be tilted
toward economic weakness."
"So that's all the more reason to assure you that the Fed will
continue to be especially alert in monitoring economic developments."
Parry said the economy "still has a lot going for it" and said "the
Fed's easing will help."
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