Tethering the Economy Is All in a Day's Work for Fed

Robert Parry, president of the Federal Reserve Bank of San Francisco, plays the metaphor game cautiously when it comes to describing the course of the United States economy. Asked whether the economy has just made a soft landing - a return to modest growth, he retorts: ''Well, perhaps. Or maybe it is making a gradual takeoff'' - that is, stepping up its pace. To economists, his phrase has a touch of humor as well as a business-cycle message. Mr. Parry says the Federal Reserve has been ''pretty successful'' in reigning in an economy that last year was surging ahead so strongly that inflation became worrisome for many economists. Parry sits on the Fed's policymaking Open Market Committee (FOMC), which over a 12-month period starting in February 1994 increased short-term interest rates seven times, doubling the rate. The Fed started to reverse this restrictive policy early in July 1995 when it dropped the rate by 0.25 percent. Revised government figures released Aug. 30 show the economy grew at a real annual rate of 1.1 percent in the second quarter of this year, better than the 0.5 percent rate originally reported by the Commerce Department. This revised figure buttresses the views of economists and officials like Parry who say that an acceptable slowing has been achieved. Others say that a somewhat higher growth rate would be better for the nation's work force. Unemployment stood at 5.6 percent in August, down from 5.7 percent in July and up from 5.4 percent in February. Nonfarm jobs grew last month by 249,000, about 80,000 more than a Reuters survey of Wall Street economists had predicted. ''It's no small achievement'' that the Fed apparently has managed to ''prevent a boom-bust cycle,'' Parry says. That has been done only twice before since World War II. The soft landing - or slow takeoff - continues the business expansion that began in spring 1991, Parry says. In 1946 and 1978 laws, Congress mandated the Fed to help the US achieve steady economic growth, stable prices, and high employment. Parry, however, says ''the Fed's primary objective is price stability,'' adding that an increase in consumer prices of between 0 and 2 percent would be satisfactory. He says inflation is coming down and if it reaches this target area, ''this will have effects on the financial markets.'' He would not specify whether he meant lower interest rates, but such an extrapolation would not be out of line with economists' expectations. Parry questions whether the Fed can be very successful at fine-tuning growth in the short term.''This is because of either lags in the economy or of uncertainty regarding what is going to happen. Monetary policy [setting interest rates and adjusting the money supply] is a blunt instrument for changing the course of the economy,'' he says. Tax rates, productivity, demographics, reducing the deficit ''are more important for growth. And monetary policy certainly does not take into account the problems in specific geographic areas.'' The US, taken as a whole, came out of its last recession in spring 1991, he points out, ''but California's recession ended only two years later.'' Parry indicates he was under pressure in his region last year to back a more expansionist monetary policy than the Fed was pursuing. Votes on policy rotate among the 12 reserve-bank presidents, except for New York. Parry was voting last year. He said he feels he must consider the needs of the entire nation when he votes on interest rates and other questions. Since coming out of recession in spring 1993, California has experienced ''very modest'' growth, Parry says. Employment grew only 1 percent last year. ''But in June and July this year, employment has grown at a rate of 2 percent in the state,'' he says, helping to stem an out-migration of workers from the state. Parry warns, though, that further planned base closings and tightening in the defense industry will continue to hit California very hard. Parry's district stretches over 33 percent of the US, from New Mexico north to Idaho and west to Alaska and Hawaii and includes 20 percent of the nation's people. His reserve bank has branches in Los Angeles, Portland, Ore., Seattle, and Salt Lake City. Each branch has seven directors from its subregion who meet monthly to pool their input on local economic factors. Parry travels extensively to meet with these groups. This decentralization of the US central bank, he says, prevents the Fed's decisions from being ''just judgments from within the beltway'' in Washington, where the chairman of the Fed and its seven governors sit. Also, he says, drawing on regional business leaders ''often enables the Fed to get good information on the economy even before statistics become available.'' Parry's region, being on the growth-prone Pacific Rim, also does more international trading than any other district, he says. He notes that because the US is more of a global economy than in the past, the FOMC ''obviously spends a lot of time talking about developments in Europe, Asia, Latin America, and their effect on the US economy.'' Mexico's peso crisis this year, he says, ''had 50 percent more impact on California than on the rest of the nation taken as a whole, but an even greater impact on Arizona and Texas.'' Some people ''are extreme and argue that we are at the mercy of developments overseas,'' he says. But he holds that the US is still basically a domestic economy.