Fed’s Pianalto Says Monetary Easing Needed to Support ‘Stronger Recovery’

Federal Reserve Bank of Cleveland President Sandra Pianalto said the central bank’s highly accommodative monetary policy is appropriate.

“Our policy is appropriate in this economic environment. It is supporting a stronger recovery while ensuring that inflation remains consistent with our mandate,” Pianalto said today in Lexington, Kentucky.

“Our highly accommodative policy is designed to help lower interest rates for consumers and businesses to encourage new borrowing, to help facilitate the refinancing of loans, and to reduce the interest costs associated with variable-rate loans,” the Cleveland Fed chief told the Rotary Club of Lexington, Kentucky. “It is an important reason why mortgage rates are near historic lows. These and other interest rates, which are far lower than typical, have played a critical role in lowering consumer debt service levels.”

Fed presidents this week differed over whether their outlook for the economy requires additional monetary easing. More action “may be needed” to reduce “persistently high unemployment,” San Francisco’s John Williams said Nov. 15 in Scottsdale, Arizona. Boston Fed President Eric Rosengren said yesterday that lower interest rates still have the ability to boost growth. James Bullard of St. Louis said the central bank’s policy is “appropriately calibrated” and should only be loosened if the economy deteriorates.

Europe, Recession

“There are signs that Europe is entering a recession or could be entering a recession,” Pianalto said in response to an audience question after her speech. “They are an important trading partner but the direct impact of slowing growth in Europe is not as great on our economy -- it could take a half percent growth off of GDP. The bigger concern I have for what’s happening in Europe is the impact on business and consumer confidence.”

Asked about whether lower interest rates are hurting savers, Pianalto said “when you look at economic analysis, the way that the Federal Reserve through our policies can stimulate economic growth is by lowering the borrowing cost.”

“When you weigh the two, lowering borrowing costs has a greater impact on the economy than the fact that savers have less income,” she said.

Growth Rate

“Typically our economy needs to grow at a rate of 2 percent just to accommodate new entrants to the workforce,” Pianalto said in her speech. “Unfortunately, my current outlook anticipates growth that is not much better than that.”

The economy grew at a 2.5 percent rate in the third quarter after a 1.3 percent pace in the previous three months and 0.4 percent from January through March. Gross domestic product will rise about 2.5 percent in 2012 and about 3 percent the following year, Pianalto said, too slow for a swift recovery in the labor market.

“In contrast with inflation, trends in employment over the medium and longer term are not predominantly a monetary phenomenon,” she said. “They are subject to other forces, including demographics, productivity, and technology.”

Pianalto said it “could take a quite a few years for the unemployment rate to fall to the neighborhood of 6 percent, which corresponds with my current estimate of what we will see when the economy attains a state of maximum sustainable employment growth.”

Jobless Benefits

Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, Labor Department figures showed today in Washington. Housing starts decreased 0.3 percent to a 628,000 annual rate in October, according to the Commerce Department. The median estimate of economists surveyed by Bloomberg News called for a drop to 610,000.

Fewer firings may signal that companies are closer to hiring more workers, reducing an unemployment rate stuck around 9 percent or higher for more than two years. At the same time, record-low mortgage rates and cheaper homes are helping to support the industry at the heart of the last recession.

“In this economy, monetary policy alone cannot cure all of the economy’s ills,” Pianalto said. “Federal Reserve actions to lower interest rates are supporting the recovery, but the usual impact of our policies has been somewhat blunted. Lower interest rates have benefited many households, but the financial crisis was so large and so pervasive that far fewer households than usual have been able to take advantage of the lower interest rates.”

The economic recovery could be boosted by policies that “help distressed households” and policies that give businesses “greater clarity about taxes and regulations,” she said.

Pianalto, 57, became president of the Cleveland Fed in 2003. She is not a voting member of the FOMC this year and has never dissented from an 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 Lexington, Kentucky at jzumbrun@bloomberg.net

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

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