Fed’s Pianalto Says U.S. Economy Likely to Grow at 3 Percent Annual Pace

Federal Reserve Bank of Cleveland President Sandra Pianalto said she expects the U.S. economic expansion to advance further and that the central bank’s current monetary stimulus is appropriate.

“I expect the economy to continue on a gradual recovery pace over the next few years, with annual growth just above 3 percent a year,” Pianalto said today in a speech in Columbus, Ohio. “I believe inflation will be temporarily elevated this year due to developments in oil and food prices, but I expect inflation to fall back below 2 percent in the next couple of years.”

“Given this outlook, I think that the current accommodative stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the FOMC’s dual mandate of stable prices and maximum employment,” Pianalto said at the Columbus Metropolitan Club.

Chairman Ben S. Bernanke and the Federal Open Market Committee plan this month to complete a $600 billion bond purchase program. At their last meeting in April they said they’ll hold interest rates “exceptionally low” for an “extended period.” They’re considering a policy plan that would follow the end of record monetary stimulus.

Pianalto said in response to audience questions that she doesn’t anticipate that the economy will fall into “stagflation,” with simultaneous high unemployment and high inflation because “there has not been a growth in the money supply.”

Kept Reserves

The Fed has funded its asset purchases by creating bank reserves, and “banks have kept those reserves. They have not put them back into the economy,” she said.

The softness in recent economic data is different from the slowdown last year, when Europe’s fiscal crisis damaged business confidence in the U.S., Pianalto said.

“This time around even though we are again seeing some softness, we’re not seeing the same reaction on the part of businesses,” she said. Businesses are hiring and “not pulling back,” indicating the “economy is on firmer footing.”

The Labor Department will report on June 3 that the economy added 175,000 jobs in May, according to the median of a Bloomberg Survey. The unemployment rate will fall to 8.9 percent from 9 percent in April, according to the survey.

More Churning

Pianalto cited research from the Cleveland Fed showing that “research reveals that historically, the more dynamism or churn in the job market, the faster the unemployment rate returns to its “trend” rate or “natural” rate, which we believe is between 5.5 and 6 percent.” She said it could take about five years for unemployment to return to that level.

“Unfortunately, the rate of churn is not returning as quickly as it has after previous recessions,” she said.

Low wage growth was likely to restrain inflation in coming years, Pianalto said.

“After a recession, wage increases typically remain low for quite some time,” she said. “This should keep the inflation rate lower because lower wage growth directly implies little rise in the cost of producing goods and providing services.”

Regular gasoline at the pump fell 0.5 cent yesterday to $3.775 a gallon, the lowest price since April 10, AAA said on its website. The Fed has said pressures from high commodity prices will have only a “transitory” effect on overall inflation.

The Labor Department said overall prices rose 3.2 percent in April from a year earlier and prices excluding food and fuel rose 1.3 percent. The Fed aims for inflation of 2 percent or a bit below. Pianalto said in a March speech that she supports an explicit inflation target of 2 percent.

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 Columbus, Ohio at jzumbrun@bloomberg.net

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

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