–More Encouraged About Modest Inflation Than About Growth Prospects
–Could Take Four To Five Years To Get Back to 6% Unemployment Rate

By Steven K. Beckner

WASHINGTON (MNI) – Cleveland Federal Reserve Bank President Sandra
Pianalto Tuesday evening said that monetary policy is “appropriately
positioned” in the face of a “frustratingly slow” economic recovery and
modest inflation.

Pianalto, a voting member of the Fed’s policymaking Federal Open
Market Committee this year, did not specifically say whether she would
support further monetary easing to counter what she called “headwinds”
to stronger growth.

However, she indicated she is more encouraged about the outlook for
inflation, despite the upsurge in oil prices, than she is about growth
and employment.

Pianalto also warned it could take another four or five years to
return to full employment of about 6% in remarks prepared for delivery
to the Medina County Economic Development Corporation in Westfield
Center, Ohio.

Most of her remarks were devoted to the regional economy, but she
briefly addressed national macroeconomic challenges and the Fed’s
approach to them.

Unlike some of her more hawkish colleagues, Pianalto found no fault
in the Fed’s extended zero federal funds rate policy or its heavy
purchases of bonds to hold down long-term interest rates.

Noting that the Fed has more than tripled the size of its balance
sheet since 2008, Pianalto said, “Our objective in taking these
alternative routes is to push down medium- and longer-term interest
rates for consumers and businesses, and we have been successful in doing
that.”

“Even though we have introduced some new techniques, we are still
operating to achieve our dual mandate of stable prices and maximum
employment,” she explained. “We still have to make policy decisions
based on forecasts, and we still have to wait for the effects of
monetary policy to work their way through the economy.”

Despite the Fed’s extraordinary efforts, Pianalto acknowledged that
“the recovery from the recent financial and economic crisis has been
frustratingly slow.”

“A number of headwinds are holding back growth,” she said. “Housing
markets continue to be depressed. The government sector has been
reducing spending and employment. Add to the mix the situation in
Europe, which could negatively impact our exports.”

“Given these numerous headwinds, I am expecting the economic
recovery to remain moderate and for the economy to grow around 2 1/2%
this year and about 3% next year,” she continued.

“Given this outlook for economic growth, it could take as long as
four to five years to achieve maximum employment, which I estimate to be
consistent with an unemployment rate of about 6%,” she added.

Pianalto said “the outlook for inflation is a little more
encouraging.”

“Both headline and core inflation slowed significantly from the
first half of last year to the second half, and I expect inflation to
remain close to 2 percent for the next few years,” she said. “Still, the
recent increases in oil prices and housing rents could complicate the
inflation picture if they persist.”

Pianalto said “we are … in a challenging environment for monetary
policymakers” since “we do not have a good deal of concrete history for
monetary policy to fit our current circumstances.”

But she said she is “confident the Federal Reserve is making the
most of its tools to move the economy in the right direction.”

“I think monetary policy is appropriately positioned to maintain
stable prices and to support economic growth that will keep us on a path
toward achieving maximum employment,” she added.

** Market News International Washington Bureau: 202-371-2121 **

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