Fed Shifts Focus Back to Threat of Inflation

Times Staff Writer

Despite immediate worries over an economic downturn in the aftermath of the October stock market crash, federal monetary policy may soon refocus its concern on the risk of higher inflation in the future, a federal banking official said Thursday.

Inflation in 1988 is expected to remain at or fall just under last year's 4% rate, but pressures nationwide and worldwide could quickly change the scene, Robert T. Parry, president of the Federal Reserve Bank in San Francisco, told 170 listeners at a Town Hall of California meeting in Irvine.

"The basic problems prior to the stock market crash are still with us: The federal budget deficit still is huge and the personal saving rate still is low," Parry said.

The San Francisco bank is one of 12 district headquarters of the Federal Reserve Board. Besides regulating national banks and providing credit to banks in nine Western states, the district bank helps to form and implement Fed monetary policies through the Fed's open-market committee. Parry will rotate into a voting position on the committee in March.

Parry said inflation was the Fed's primary concern before the Oct. 19 stock market debacle slowed the economy and lowered interest rates. But the economy is not slowing down significantly, he said, and the seeds of inflation are still present.

He weaved a scenario of cause-effect relationships that showed how worldwide economic growth has become entwined and how the federal government has become so dependent on foreign credit.

The federal government must continue financing its $148-billion deficit, which should rise to $170 billion this year, he said.

But Americans are not saving enough money to provide the credit the government needs, he said, so the United States has been going to foreign lenders to help fulfill its needs.

"Should a rapidly deteriorating dollar make foreigners less willing to lend in this country, our interest rates could jump quite sharply," he said. "In addition, a rapidly falling dollar slows growth in the economies of our trading partners by reducing their exports and increasing their imports."

While the huge foreign trade deficit would be eased, political relationships could be harmed, he said. And higher interest rates would spur inflation here, he said.

The Fed could offset the threat of higher interest rates through easier monetary policies, he said, but that approach is "unacceptable" because it would itself lead to higher inflation.

Other pressures pushing inflation are lower unemployment and fast-rising wages. In addition, a sudden jump in oil prices--always possible but believed to be unlikely in the foreseeable future--and potential federal legislation protecting U.S. manufacturers would lead to business stagnation and inflation, he said.

"Thus, unless a solution soon is found to the federal government's budget problem, or Americans begin to save a larger share of their incomes, the underlying pressures in the economy will be for higher inflation," Parry said.

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