By Steven K. Beckner

(MNI) – Cleveland Federal Reserve Bank President Sandra Pianalto
suggested Tuesday that U.S. monetary policy is not as easy as it may
seem and said she will weigh the costs and benefits of further Fed
easing in coming months.

Pianalto, who will be voting on the Fed’s policymaking Federal Open
Market Committee this year, suggested that the Fed has met the “price
stability” aspect of its statutory “dual mandate,” but is missing bad on
its full employment mandate.

Without openly advocating additional monetary easing, her comments
suggest that she would tend to vote for it if Fed Chairman Ben Bernanke
asked for it.

“Despite our current accommodative monetary policy, the recovery
from the recent financial and economic crisis has been frustratingly
slow,” she said.

“While it is true that the federal funds rate has been near zero
for some time, some economic policy models indicate that monetary policy
should be even more accommodative than it is today,” she said. “And this
is true even after accounting for the large scale asset programs the
FOMC has initiated to compensate for the fact that the federal funds
rate cannot go below zero.”

Pianalto noted that she has supported past Fed easing and said
“there is evidence that they have been effective.”

“For example, an analysis published early last year by Federal
Reserve Bank of San Francisco President John Williams and several
economists at the Federal Reserve Board concludes that by the end of
this year the expansion of the Federal Reserve’s securities holdings
since late 2008 results in an unemployment rate that is 1-1/2 percentage
points lower than what it would have been absent the purchases,” she
said. “They also conclude that the asset purchases most likely prevented
the U.S. economy from falling into deflation.”

As a voter, Pianalto said “going forward I will continue to weigh
the costs and benefits of further policy actions.”

Although the unemployment rate fell to 8.5% in December, she said
this is still “too high” relative to a “natural” unemployment rate which
she estimated at about 6%.

“Given my current outlook for economic growth of 2-1/2 percent for
this year and 3 percent for next year, it is going to take four to five
years to reach that rate,” she said.

Meanwhile, she predicted inflation will run below 2% in the first
half of 2012.

She suggested that the Fed can afford to put greater priority on
reducing unemployment than on fighting inflation.

“In my view we are close to price stability, which I define as an
inflation rate of 2% over the medium term,” she said. “But the economy
remains far away from full employment. According to my outlook, an
unemployment rate of 6% will take longer to reach, perhaps even four or
five years.”

She added that she wants “to be on a path toward full employment
that doesn’t create an inflation problem down the road.”

** Market News International **

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