A month-long decline in stocks poses a growing risk to the US economy's recovery, leaving Federal Reserve policy makers in no hurry to raise interest rates, said Robert Parry, president of the Fed Bank of San Francisco.
"The uncertainties, of course, have been intensified by concerns about corporate accounting practices and about the recent decline in broad stock market indexes," Parry said in the text of a speech to a conference of economists in Los Angeles.
PHOTO: AP
Inflation "does not appear to be an imminent problem," he said, with the consumer price index up 1.6 percent over the last 12 months and core prices, excluding food and energy 2.5 percent higher. Worker productivity has grown at an average 4.3 percent annual rate over the last year and that will help keep inflation in check, reducing the need to raise rates, Parry said.
The Dow Jones Industrial Average has declined in each of the past four weeks, falling almost 7 percent over the period to a seven-month low on Friday. The NASDAQ Composite Index has dropped 1 percent over four weeks. Parry added the recent declines to a list of concerns that may hurt business investment and consumer spending, which accounts for two-thirds of the economy.
The Dow rose 189 points on Monday, or 2 percent, and the NASDAQ climbed 3.1 percent.
Parry is a non-voting member this year of the Fed's policy-setting Open Market Committee. The group will meet next week and all 38 economists in a Bloomberg News survey expect it will keep the benchmark overnight bank lending rate at a 40-year low of 1.75 percent.
A recession that began in March 2001 probably ended in December or January and the economy now is "in the midst of a modest expansion," Parry said. Repeating earlier observations, Parry said he wants to see business investment join "respectable" consumer spending in fueling growth.
"To keep the expansion going, we'll need to see businesses pick up their spending on equipment and software. Core inflation does not appear to be an imminent problem, not only because of the faster productivity growth, but also because there's still quite a bit of excess capacity left in the economy," Parry said.
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