It’s too soon to tell if interest rate increases have slowed the economy enough to curb inflation, the president of the Federal Reserve Bank of San Francisco said at a business breakfast meeting at the Sheraton San Diego Hotel.
“If you don’t control inflation, you have a volatile economy and growth suffers,” Robert T. Parry said during the June 14 meeting.
To monitor the inflation rate, the Federal Reserve Board is watching the level of new construction and also industrial production. He’s been encouraged by recent statistics, both of which are declining.
Gains in worker productivity in recent years have helped keep inflation in check by reducing the labor cost component of production, he said. However, increasing consumer demand for goods fueled in part by high employment levels and the wealth created by the rising stock market has triggered inflationary pressures that need to be eased, he said.
Consequently, the Federal Reserve System has been raising interest rates for the past year. They have raised the discount rate it charges banks to borrow money and have sold government securities, thereby taking the money used to purchase them out of circulation and creating a shortage that drives up the cost of borrowing higher.
County Supervisor Dianne Jacob also spoke to the breakfast audience and she cautioned higher interest rates have already led to a slowing in consumer demand for new housing in San Diego County, one sign the Fed’s moves are working locally.
Parry defended the Fed’s interest rate tightening, saying the government bank has followed a very cautious approach to raising rates in recent years.
“The greatest challenge we face is making sure long-term growth continues, but we don’t know what a sustainable rate of growth is,” Parry said, adding the national economy has grown 3.7 percent in the past year, a figure that is higher than the historical average of 3 percent.
He declined to predict whether more interest rate increases are coming soon. If there are, however, it’s unlikely they will trigger a recession because the government is proceeding cautiously at raising rates, he said.
