New York, NY, Apr. 12--U.S. interest rates cannot remain at their 1958 lows forever and will have to rise at some point, perhaps to 3.5%, Federal Reserve Bank of San Francisco President Robert Parry said.
In an interview carried by the San Francisco Chronicle on Sunday, Parry said the Fed funds rate could not remain at 1.0% indefinitely.
"Let's assume inflation averages 1% to 2%. Then you could see maybe the natural funds rate would be--I don't know--3.5%, something like that," Parry said.
Still, Parry sounded comfortable with the outlook for inflation. "I think inflation is reasonably well behaved at the present time," he said, adding that the risks going forward were reasonably well balanced.
Parry is not a voting member on the Fed's Open Market Committee at the moment, and is set to retire in June.
He took an upbeat view on productivity, which he noted had been growing at an annual clip of 4.5% since 2000.
"The long-run trend of productivity growth probably will be higher than what we've seen in the past. If I had to pick a number, not an original number, it would be 2.5% to 3%," he said.
"I think that is very significant for the future. It contains inflationary pressures," said Parry.
The downside of such productivity was that some industries needed to hire less, he added.
"I have great difficulty believing that the rapid growth of productivity we have experienced in the last three years will continue. If it doesn't continue and output increases at 4% or 4.5%, you are going to see job growth accelerate," Parry said.
Parry noted that when the Fed funds rate finally rose, mortgage rates would likely follow and that could be a hurdle for the housing market.
"At the same time, rates would be moving up because the economy was growing. Employment was growing. It may mean there would be greater incomes to support housing," he said.
Parry downplayed the effect of outsourcing and the sending of jos offshore on the U.S. labor market, noting that discussion of the topic is distorted ahead of the November presidential election.
"I'd make a general statement that in years evenly divisible by four, economic and financial discourse is not objective," said Parry. "Some people have decided that they are going to focus on just one part of this whole issue, and I think it's appalling."
