–Post-QE2 Announcement; Encouraged By Some Results So Far
–Fed’s ‘Extremely Accommodative’ Policy Has Been Effective
–Promoting Price Stability Best Course For Economic Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – Cleveland Federal Reserve President Sandra
Pianalto Thursday declared that the policy actions implemented by the
Fed to support a battered economy have been effective, but there are
still enough risks to growth and price stability to merit the central
bank’s additional quantitative easing measures.

In remarks at Case Western Reserve University in Cleveland,
Pianalto said the Fed’s actions to aid the economy following the crisis
“resulted in what we at the Federal Reserve refer to as ‘an extremely
accommodative monetary policy stance.’ I believe this stance has been
effective.”

But, she added, the remnants of the financial crisis are still
holding back economic progress. Households have become more cautious,
consumers have sharply cut back on spending, and in the face of weak
demand companies are still hesitant about adding people back onto their
payrolls.

However, Pianalto noted that economists at the Cleveland Fed have
concluded that most of the rise in unemployment in the U.S. is cyclical.
“The most important reason employers are hiring so slowly is that their
business activity has been slow to pick up, not because there has been a
sudden mismatch between worker skills and available jobs,” she said.

As for how this relates to the Fed’s mandate of maximum employment,
Pianalto said she expects the unemployment rate to remain elevated for
“quite some time,” and will not fall below 8% before 2013.

As for the Fed’s other mandate, price stability, Pianalto noted the
current high level of uncertainty about the direction of prices. “Given
the momentum toward lower inflation rates and sizable amounts of labor
market slack already evident in today’s pricing decisions, I expect core
inflation to remain quite subdued through 2013,” she said.

And while she does not expect an outright decline in general price
levels, the fact that demand remains weak and unemployment so high means
further disinflation remains a risk to her outlook.

“I take this risk seriously, because in periods of significant
economic slack, very low inflation risks tipping into deflation,” she
said. “So at least over the next few years, my outlook leaves the
economy falling short in both parts of the Federal Reserve’s dual
mandate of price stability and maximum employment.”

Citing these concerns, Pianalto said there were enough negative
risks to growth and disinflation in her outlook to merit another round
of large-scale asset purchases to protect the economy from those risks.

Although some fear that QE2 could overshoot and spark inflation up
past the Fed’s comfort zone, she said if the Fed does begin to see the
buildup of undesirable inflationary pressures, “I am confident that the
FOMC is well prepared to counteract them.”

The central bank, Pianalto said, has developed tools that it
expects to be very effective when the time comes to use them.

Consequently, she added, “I am not overly concerned that inflation
will accelerate beyond my price stability objective of 2%.”

Since the FOMC announced its decision on Nov. 3, Fed officials have
come out in favor of or against the plan. Pianalto made it clear which
side she is on, saying, “I voted to support additional asset purchases,
and I am encouraged by some of the results so far.”

She pointed out that inflation expectations moved closer to her
longer-term inflation objective in anticipation of FOMC announcement,
and they have stayed that way.

“I think our policy action offers the right kind of insurance that
the Federal Reserve’s monetary policy will support the economic
expansion while stabilizing inflation and inflation expectations
consistent with our price stability mandate,” she said.

Pianalto concluded that by promoting price stability, the Federal
Reserve is following the best course for supporting the economic
recovery.

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

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