–Current Mon Pol Stance Appropriate Given Current Outlook

By Brai Odion-Esene

WASHINGTON (MNI) – Cleveland Federal Reserve Bank President Sandra
Pianalto Friday said the Fed must remain just as focused on inflation as
it is on meeting its maximum employment mandate, warning that providing
even more stimulus “could risk an unwelcome rise in inflation.”

In an interview published in the Cleveland Fed’s policy
publication, Forefront, Pianalto also cautioned against the Fed being
too hasty in withdrawing the current easy policy in place, as it could
risk slowing the recovery and causing disinflation.

Pianalto is a voter on the Fed’s policymaking Federal Open Market
Committee this year, and she forecast the U.S. economy to grow by “a
little more” than 2.5% this year and 3% next year, with inflation
staying close to 2%.

“My forecast for either economic growth or inflation would have to
change for me to want to make a change in the stance of monetary
policy,” she said, adding that “given my current outlook for the
economy, the current stance of monetary policy is appropriate.”

“If my forecast were to change significantly, then I would want to
look at the appropriate policy response, and perhaps make an adjustment
to my monetary policy stance in response to a change in my forecast,”
Pianalto said.

The following are excerpts from the interview with Pianalto:

Q: Let’s talk more directly about current circumstances. If
inflation is near our goal right now, why not try to go faster and get
that unemployment rate down sooner?

Pianalto: We always have to stay focused on a balanced approach. I
would be concerned that if we were to provide even more policy stimulus,
given my current outlook, we could risk an unwelcome rise in inflation.
On the other hand, if we were to remove our policy accommodation too
quickly, I would be concerned that we would risk slowing the economy and
causing an unwelcome disinflation. I think we have to strike a balance,
and I think we have a good balance with our current policy.

—

Q: If we get into the summer and begin to see another one of these
patterns of the economy slowing down, do you think that would be the
time to support further easing in policy and maybe be willing to take a
little more risk on the inflation side of things in order to get the
economy moving again?

Pianalto: Right now my forecast is for the economy to grow a little
more than 2.5 percent this year and 3 percent next year, with inflation
staying close to 2 percent. My forecast for either economic growth or
inflation would have to change for me to want to make a change in the
stance of monetary policy. Given my current outlook for the economy, the
current stance of monetary policy is appropriate. If my forecast were to
change significantly, then I would want to look at the appropriate
policy response, and perhaps make an adjustment to my monetary policy
stance in response to a change in my forecast.

—

Q: You suggested that maybe it’s not such a good idea to be pushing
so hard on monetary policy because there’s an inflation risk. But
clearly the unemployment rate is very high. Are there some other factors
at work keeping that unemployment rate up?

Pianalto: I still believe that our current high unemployment is a
cyclical problem and not a structural one. There’s been a longstanding
relationship between the amount of growth in the economy and the
improvement that it translates into in terms of job creation. We’ve had
a very weak recovery that hasn’t created a lot of jobs. So the slow pace
of this recovery is causing that unemployment rate to move down more
slowly than we’d like.

I’m reassured that this issue is cyclical and not structural when I
look at job openings. Prior to the recession, there were two individuals
looking for every job that was open, so it was a 2-for-1 ratio. During
this recession, that number has jumped to four people looking for every
one job opening. So we just have a very slow pace of job openings,
which, again, is cyclical, in my thinking.

But we’re also finding that it’s taking longer to match the skills
that people have to the skills that are needed in available jobs. It may
be that because these jobs require more training, more skills, more
education, it is taking a little more time to make a match. That’s
another reason why it’s taking longer to bring the unemployment rate
down.

—

Q: In that context, some people say the Committee is being maybe
way too conservative about the inflation risk and that the emphasis on
price stability is holding the economy back from getting this
unemployment rate down. What is your view?

Pianalto: I think it’s important for us to maintain low and stable
inflation in order for the economy to grow. I think our two objectives
are complementary. We’ve learned over a long period of time that a low
and stable inflation rate actually is necessary for longer-term economic
growth. So I think it is appropriate for the Fed to stay focused on
maintaining a low and stable inflation rate near our 2 percent objective
in order to provide an environment for the economy to grow, and
therefore for employment to grow, for jobs to be created.

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

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