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Pianalto Says New Fed Easing Not Needed Amid Slow Growth

Cleveland Federal Reserve Bank President Sandra Pianalto said more easing isn’t necessary even though she predicts just moderate growth and the jobless rate probably won’t fall to 6 percent for about four years.

The world’s largest economy will expand by “slightly above” 2.5 percent this year and 3 percent in 2013 and 2014, Pianalto, a voting member on the policy-setting Federal Open Market Committee, said today in a speech in Cleveland. Inflation will probably remain close to the Fed’s 2 percent goal through 2014, she said.

“My inflation outlook, although it is close to the 2 percent objective, is based on an economy that is working through a significant amount of cyclical weakness over the projection horizon,” Pianalto said. “My outlook for both economic activity and inflation relies on monetary policy remaining accommodative.”

Fed policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their April 24-25 meeting showed. U.S. companies probably hired 150,000 workers in May, according to the median of 79 economist estimates in a Bloomberg survey before the report due tomorrow, while unemployment probably was unchanged at 8.1 percent.

Permanent Unemployment

The elevated jobless rate is primarily due to a sluggish recovery and the reluctance of many companies to hire, Pianalto said at a National Association for Business Economics conference at the Cleveland Fed. Before the recession, there were about as many job seekers as openings, she said. Today there are about three people hunting for each opening.

High joblessness may persist even with faster economic growth because workers facing prolonged unemployment lose their skills, Pianalto said.

“What is extraordinary about today’s economy is the number of unemployed people compared to the number of job openings,” Pianalto said. “These facts make a lot of today’s unemployment look more cyclical than structural to me, although persistent cyclical unemployment runs the risk of translating into structural unemployment through the loss of skills.”

Pianalto said additional easing isn’t needed to generate more job growth. Boston Fed President Eric Rosengren called yesterday for new monetary stimulus, saying economic growth is too weak to boost employment.

‘Highly Accommodative’

“Our monetary policy stance is appropriate,” Pianalto told reporters after her speech in response to a question about Rosengren’s remarks. “We are providing a highly accommodative monetary policy.”

Europe’s debt crisis presents “a risk to the outlook” for economic projections by policy makers, who must assess the potential impact should the region’s economy worsen, she said.

“The uncertainties around our forecast have been very large,” Pianalto told reporters. “These are uncertain times. That’s why I think it’s important to keep an open mind about the policy response.”

The outlook for manufacturing in the U.S. is “bright” and rising skill levels and educational attainment will boost incomes, the regional Fed chief said.

“Manufacturing is such an important player in innovation,” Pianalto said. “If we can remain innovative and continue to maintain and increase the skill level of our workers, that will drive economic growth in this country.”

June Meeting

The FOMC next meets in Washington on June 19-20. In September, the committee said it would sell $400 billion of short-term securities and buy $400 billion in longer-term securities, to reduce borrowing costs and spur the recovery. The program, known as Operation Twist, is scheduled to be completed in June.

The Standard & Poor’s 500 Index fell 1 percent to 1,300.14 as of 11:09 a.m. in New York, while the yield on the 10-year Treasury note declined eight basis points, or 0.08 percentage point, to 1.538 percent.

Policy makers at the central bank last month repeated their pledge to keep interest rates low through at least late 2014, citing the elevated unemployment rate. Reports since that meeting have underscored the uncertain outlook, with releases this week showing that consumer confidence fell for a fourth month as optimism about job prospects faded, and that pending home sales dropped 5.5 percent in April.

Pianalto, 57, has been president of the Cleveland Fed since 2003. She first joined the regional bank in 1983 as an economist in the research department.

To contact the reporter on this story: Jeff Kearns in Cleveland at jkearns3@bloomberg.net

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

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