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."