By Yali N’Diaye

WASHINGTON (MNI) – Given her deteriorating economic outlook,
Cleveland Federal Reserve President Sandra Pianalto Friday said she
supported the Federal Open Market Committee’s policy decision to put a
date on the “extended period” during which low are likely to stay
exceptionally low.

In prepared remarks to the Community Bankers Association of Ohio
Annual Convention, Columbus, Ohio, Pianalto offered her “diminished’
economic outlook, expressing concern about consumer spending in
particular.

Commenting on the recent stock market volatility, Pianalto
interpreted it as “both an expression of worry and yet another cause for
worry about consumer spending,” which she said is unlikely to provide
any “boost” to the economy “anytime soon.”

“With my diminished outlook for economic growth, and my outlook for
inflation to soon fall back to 2%, I was in favor of providing
additional support to the recovery at last week’s FOMC meeting,”
Pianalto said.

At its August 9 meeting, the FOMC had said that economic conditions
“are likely to warrant” exceptionally low rates through at least
mid-2013.

Pianalto, who will become a voting member of the FOMC next year,
said the central bank had to find “a way to put downward pressure on
interest rates along the yield curve.”

To that regard, giving the mid-2013 date was an appropriate
nontraditional tool, she said. While the outlook can change, “I think it
made sense to take the unprecedented step of including that conditional
guidance in our press statement,” Pianalto said.

She expects activity to grow at a pace of about 2% this year,
before accelerating to 3% both in 2012 and 2013.

Foreclosures, she said, remain a “serious problem.”

Against this backdrop, “I think it will take quite a few years for
the unemployment rate to fall to more typical levels, in the
neighborhood of 5.5%,” she said, making it unlikely consumer spending
will provide support.

In addition, “The housing sector remains very depressed,” with
foreclosures remaining a “serious” issue.

In light of the slack in the economy, “I see the inflation rate
stepping down from its current level over the rest of this year and into
next year as well,” she added.

Pianalto sees inflation to average 2% or “a bit less” in 2012 and
2013.

Despite the economic slack, Pianalto underlined some bright spots,
namely business investment on equipment and software.

In addition, businesses have accumulated cash, she said, although
they are reluctant to spend it.

Pianalto’s speech on ‘The Evolving Financial Services Industry and
the Outlook for U.S. Economic Growth’ otherwise focused on small
business access to credit and the impact of regulations on the financial
services industry.

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

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