Fed’s Pianalto Sees ‘Virtuous Cycle of Growth’ in Economy

Federal Reserve Bank of Cleveland President Sandra Pianalto said today she sees the U.S. economy continuing to expand at a ‘moderate pace.”

“I am seeing clearer signs of a virtuous cycle of growth,” Pianalto said in a speech in Akron, Ohio. “Rising incomes and rising profits are supporting growth in retail sales and business demand, which in turn fuels more growth in incomes and profits.”

“I expect the economy to expand at a moderate pace, slightly above the average growth rate of about 3 percent a year,” Pianalto said at the University of Akron Economic Summit.

Fed Chairman Ben S. Bernanke and the Federal Open Market Committee are pressing through with their plan to purchase $600 billion in Treasury securities to boost the economic recovery, amid threats to growth such as higher oil prices, unrest in the Middle East and earthquakes in Japan.

“At this point, the recent sharp rise in energy costs associated with unrest in the Middle East and North Africa is a key risk. If the spike in oil prices is sustained, it will potentially slow the pace of GDP growth,” said Pianalto.

“I expect these effects to be transitory,” Pianalto said, echoing language from the March 15 FOMC meeting where the Fed said that while rising commodity prices are putting upward pressure on inflation the effect is likely to be “transitory.”

‘Close Attention’

The Fed will “pay close attention to the evolution of inflation and inflation expectations,” the FOMC’s statement said.

Consumer prices in the U.S. climbed more than forecast in February, led by the highest food prices since 2008 and rising fuel costs. The Labor Department’s consumer-price index increased 0.5 percent, the department said last week in Washington. Excluding volatile food and fuel costs, the so- called core gauge rose 0.2 percent for a second month, also more than estimated.

“Americans have been hit with sharply higher prices for food and energy,” said Pianalto. “These price increases have been especially hard on lower-income households, who spend a higher proportion of their after-tax income on food and energy.”

Pianalto said periods of rising food and energy inflation tend to be balanced by drops in inflation and that “to cause a lasting rise in inflation, the increases in food or energy prices have to be large enough and persist long enough that they spill over and cause sustained increases in a wide array of other consumer prices.”

‘Underlying Trend’

“At this point, there is no evidence of broad spillover,” said Pianalto, adding that she expects the “underlying trend in broad consumer prices” to rise “only gradually” toward 2 percent by 2013.

Economists lowered their forecasts for growth and raised their forecasts for inflation in a March 4-10 Bloomberg survey. Economists expect 3 percent growth in 2011, down from 3.2 percent in the February survey. Inflation for the year will be 2.3 percent. In February, economists predicted 1.9 percent inflation.

Pianalto, 56, became president of the Cleveland Fed in 2003. She is not a voting member of the FOMC this year and has never dissented from a FOMC decision. Fed presidents rotate voting on monetary policy, with Pianalto voting every other year.

To contact the reporter on this story: Joshua Zumbrun in Akron, Ohio at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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