–Conditions Call For Current ‘Highly Accommodative’ Monetary Policy
–Have Voted In Favor Of Rates Staying Low Through 2014

By Brai Odion-Esene

CLEVELAND (MNI) – Cleveland Federal Reserve Bank President Sandra
Pianalto said Thursday the U.S. economy continues to display
“considerable” cyclical weakness, which justifies the current “highly
accommodative” stance of monetary policy.

In a keynote speech to open the National Association for Business
Economics’ Industry Conference, Pianalto also said she believes the high
jobless rate in the U.S. is more cyclical than structural, although
there is a risk this could change with persistent unemployment.

“My current assessment is that the real economy continues to show
considerable cyclical weakness,” Pianalto said. “This assessment, along
with my outlook for moderate growth and subdued inflation, calls for
today’s highly accommodative monetary policy.”

Pianalto is a voter on the Fed’s policymaking Federal Open Market
Committee this year.

On a day when the initial estimate of second quarter U.S. GDP
growth was revised to 1.9% from 2.2%, Pianalto projected the economy to
grow “at a moderate rate” of slightly above 2.5% this year and around 3%
in 2013 and 2014.

“At this pace of growth, I expect that it could take as long as
four to five years for the unemployment rate to fall to the 6% rate I
judge to be consistent with maximum employment,” she added.

As for prices, she sees inflation running “very close” to the Fed’s
longer-run objective of 2% through 2014.

Pianalto cautioned, however, that her inflation outlook — while
close to the Fed’s explicit target — “is based on an economy that is
working through a significant amount of cyclical weakness over the
projection horizon.”

“My outlook for both economic activity and inflation relies on
monetary policy remaining accommodative,” the Cleveland Fed chief added.

“Therefore, I have voted in favor of the FOMC’s policy statements
and actions, including the statement that economic conditions ‘are
likely to warrant exceptionally low levels for the federal funds rate at
least through late 2014.'”

Pianalto repeated the warning now commonly used by senior Fed
officials, that the late-2014 date is not a commitment. “Rather, it
conveys the FOMC’s collective judgment of when economic conditions would
warrant an increase in the federal funds rate,” she said.

“If there is a substantial change in the economic outlook, or risks
to the outlook, then the guidance would change appropriately,” she said.

Pianalto emphasized that monetary policy is not something the FOMC
should just “set and forget,” but that “it must evolve with the FOMC’s
outlook, including its estimates for structural and cyclical impacts of
the recession.”

“Above all, in these uncertain times, I think it is important to
keep an open mind and take a balanced approach to meeting our dual
mandate,” she said.

The Labor Department Thursday reported that initial claims for
unemployment benefits rose to by 10,000 to a level of 383,000 last week,
while the number of long-term claimants fell to 3.242 million.

“Today’s unemployment look more cyclical than structural to me,”
Pianalto said, arguing that “If today’s high unemployment were largely
due to structural factors, then the labor market would be tighter than
it appears to be, and we should see some wage pressures. This has not
been the case to date, as growth in the Employment Cost Index has
remained quite subdued.”

She warned, however, that “persistent cyclical unemployment runs
the risk of translating into structural unemployment through the loss of
skills.”

Another area that warrants monitoring is how business investment
activity develops in the coming months, Pianalto said.

“If the uncertainties restraining investment diminish with a
stronger expansion, then we may see investment activity pick up, which
is the typical cyclical response,” she said.

“If, on the other hand, the primary restraints on capacity
expansion are more persistent, then this reduced-investment environment
may be more of a structural limit,” Pianalto concluded.

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

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