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Taxes, Budget Cuts May Slow Recovery : Economy: The Fed’s Western regional president says he still expects ‘moderate economic growth.’

From Associated Press

A Federal Reserve official expects “moderate economic growth” the rest of this year but says tax increases and budget cuts could slow the pace of recovery from the recession.

Higher taxes and reduced rates of spending growth to solve fiscal problems of states and cities may keep the recovery from being robust, Robert T. Parry, the Fed’s Western regional president, said Monday.

“Those actions, as desirable as they may be, would have the impact of slowing the economic expansion,” Parry said in an interview before speaking to a service club.

“It’s perhaps most dramatically illustrated by California because we did raise taxes and are reducing the growth of the spending,” Parry added. The Legislature enacted a series of spending cuts and tax increases that eliminated a projected deficit of nearly $14 billion.

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Parry said his projections may not work out because economists have a hard time making accurate projections near the bottom of a recession.

“Signals are really always conflicting at this time of the cycle,” he explained. “You’re getting some signs of expansion. At other times, you get numbers that suggest that we’re still in a period of recession. So it is a bit of a conflicting time.”

Parry told Fresno Rotarians that it would be wrong to lower interest rates to spur growth near the end of a recession.

“There have been too many times when policy has eased well after the trough has passed,” Parry said. “These instances typically were followed by unsustainable growth and, eventually, painful struggles with inflation.”

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He said the Federal Reserve should help the economy recover from the recession, but added: “We cannot lose sight of our longer-term goal, which is to control and ultimately eliminate, inflation.”

Parry is generally a tight credit advocate among the 12 Federal Reserve presidents who meet every six weeks with seven Fed governors in Washington to set the direction of interest rates. Only five of the 12 presidents vote at any one time, but all can join in discussions.

Parry, whose territory covers the nine western states, thinks inflation will decrease after the economy starts improving.


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