LOS ANGELES -- Robert Parry, president of the Federal Reserve Bank of San Francisco, said the dollar's decline will prove to be an important stimulus to economic growth.
He said the dollar's depreciation against other currencies, brought on by lower U.S. interest rates, continues a pattern that began a year ago.
"The 15% depreciation since then will be an important impetus to growth in this country over the next year," he said in remarks to a community group in Ashland, Ore.
Mr. Parry said the weaker dollar stimulates demand for U.S. exports, spurs domestic consumption of U.S. goods as compared with imports, boosts spending on business equipment and consumer durables, and stimulates residential investment.
Threat of Inflation
Nonetheless, the United States can look forward to only a "moderate" expansion because of lingering inflationary expectations and other potential drags on the recovery.
He said long-term rates, though falling, remain higher than expected, given the sharp drop in short-term rates.
"In this environment, an easing of short-term rates sometimes leads to higher inflation expectations," he said. "And higher inflation expectations translate into higher long-term interest rates, which are counterproductive to efforts to boost economic activity."
As the public expectations of inflation fall, he said, the Fed will have more latitude to react to weakness in the economy when necessary.
Citing a recent consumer survey, Mr. Parry said consumers persist in expecting annual inflation to average 5% over the next 10 years.
The core rate of consumer inflation was 4.5% in 1991. He sees it declining to about 3% for 1992 as whole, as well as in 1993.
Hitting the Right Balance
Persistent inflation fears have contributed to the Fed's quandary about the right level for short-term interest rates in lights of stubbornly higher long-term rates, Mr. Parry said.
"The behavior of long-term interest rates -- for example, on corporate and government bonds -- has put the Fed in a bit of a bind in recent years," he said.
He reiterated that the Fed's goal is to help sustain recovery without spurring inflation.