By Steven K. Beckner

(MNI) – Cleveland Federal Reserve Bank President Sandra Pianalto
said Tuesday the Fed must do its part in spurring demand and
strengthening the recovery, but cannot do it all.

Pianalto, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, called current monetary policy
“highly accommodative” and “appropriate.” She did not indicate whether
or under what conditions she would support additional easing in remarks
prepared for delivery to the Rotary Club of Lexington, Kentucky.

Pianalto, who backed monetary stimulus measures as an FOMC voter
last year, did indicate she is in no hurry to raise the federal funds
rate from near zero, saying low interest rates are playing “a critical
role” in supporting consumer and business spending.

Apropos her speaking venue — in the heart of Kentucky’s bluegrass,
racehorse country — Pianalto likened watching the economy recover to
“watching your favorite horse run on a sloppy track.”

She projected 2.5% real GDP growth next year and 3% growth in 2013
as the economy faces a number of “headwinds” and “uncertainties.”
Calling unemployment “stubbornly high,” she predicted it will take
“quite a few years” to reduce it from 9% to 6%.

Most of this unemployment is “cyclical,” not “structural” in nature
— and hence amenable to monetary stimulus, she said.

“Our highly accommodative policy is designed to help lower interest
rates for consumers and businesses to encourage new borrowing, to help
facilitate the refinancing of loans, and to reduce the interest costs
associated with variable-rate loans,” said Pianalto. “It is an important
reason why mortgage rates are near historic lows.”

“These and other interest rates, which are far lower than typical,
have played a critical role in lowering consumer debt service levels,”
she continued. “Our policy is appropriate in this economic environment;
it is supporting a stronger recovery while ensuring that inflation
remains consistent with our mandate.”

Pianalto suggested that inflation does not pose a risk as the Fed
seeks to spur demand and reduce cyclical unemployment. She predicted
inflation will average around 2% over the next few years.

Echoing a number of her colleagues, Pianalto stressed that the Fed
cannot be expected to restore prosperity by itself.

“Monetary policy must do its part, and has been doing its part, to
spur the pace of growth while staying consistent with our mandate for
price stability,” she said. “But in this economy, monetary policy alone
cannot cure all of the economy’s ills.”

“Federal Reserve actions to lower interest rates are supporting the
recovery, but the usual impact of our policies has been somewhat
blunted,” she said. “Lower interest rates have benefited many
households, but the financial crisis was so large and so pervasive that
far fewer households than usual have been able to take advantage of the
lower interest rates.”

“Beyond monetary policy, our economy would benefit from policies
that help distressed households and from policies that give businesses
greater clarity about taxes and regulations,” she added.

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

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