–Seeing More Evidence That Growth Becoming ‘Self-Sustaining’
–Against Further Easing Or Tightening Prematurely

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve’s current monetary policy
stance is “best suited” to continued economic growth and job creation,
while ensuring inflation remains under control, Cleveland Federal
Reserve Bank President Sandra Pianalto said Monday.

In remarks prepared for the Economic Roundtable of the Ohio Valley
in Marietta, Ohio, Pianalto also counseled against calls for the Fed
either to inject more stimulus into the economy or consider tightening
policy because of improved economic data. Pianalto is a voter on the
Fed’s policymaking Federal Open Market Committee this year.

“I believe that our accommodative monetary policy has put the
economy on a path, albeit gradual, that will achieve our maximum
employment objective while maintaining price stability,” she said, but,
“Trying to accelerate the pace of economic growth by easing monetary
conditions further could put the Committee’s price stability objective
at risk. Alternatively, removing policy accommodation prematurely could
risk breaking the momentum of the expansion and causing disinflation.”

“With my current outlook, I think our policy stance is still the
one best suited to foster steady gains in output and employment and to
maintain stable prices,” Pianalto said.

She also cautioned again that although the FOMC stated that
economic conditions are likely to warrant short-term interest rates at
exceptionally low levels at least through late 2014, “this statement is
not a commitment … rather, it is an expression of what the Committee
judges to be the earliest time that we would likely raise interest rates
based on our current economic outlook.”

In terms of her outlook, Pianalto said the economy is gradually
improving, and that while some uncertainty remains, “I am seeing more
evidence that our economic expansion is becoming self-sustaining.”

Labor market information has been promising over the past few
months, she said, with employment gains having picked up, and new claims
for unemployment insurance have trended down. In addition, households
have made notable progress in reducing their debt burdens, freeing up
additional dollars for both spending and saving.

Despite these positive signs, the economy still faces a number of
headwinds, Pianalto said. “Housing markets are still in distress
throughout much of the country; state and local governments are still in
the process of adjusting to budget pressures; and rising gasoline prices
are likely to restrain household spending.”

“Furthermore, strains in European financial markets continue to
pose downside risks. For all these reasons, businesses and households
remain cautious about the future,” she added.

Based on this, Pianalto said her outlook calls for the economy to
continue improving at a gradual pace, growing about 2.5% this year and
around 3% next year.

She went on to warn that, “At this moderate pace of growth, it
could take as long as four or five years for the unemployment rate to
fall to the 6% rate that I judge to be consistent with maximum

On the issue of inflation, Pianalto argued that while movements in
the prices of volatile items such as gasoline and food products “can
either temporarily boost or depress the overall inflation rate, “these
temporary movements can be misleading signals of where inflation is
heading over an extended period of time.”

And with labor costs also subdued, Pianalto said her outlook is for
inflation to remain close to 2% on average for the next few years,
in line with the Fed’s target.

“Still, the recent spike in gasoline prices could complicate the
inflation picture if it persists,” she said.

** MNI Washington Bureau: 202-371-2121 **