“Large-scale asset purchases can be effective” and they “justify more analysis,” Pianalto said today in a speech in Newark, Ohio. “It is conceivable that, at some point, policies designed to promote further declines in rates could interfere with financial stability.”
Pianalto’s concern about the risks from more bond buying contrasts with the views of presidents Charles Evans of Chicago, San Francisco’s John Williams and Boston’s Eric Rosengren, who favor “open-ended” purchases of securities. Pianalto and Williams vote on the Federal Open Market Committee this year, while Evans and Rosengren don’t.
Fed policy makers plan to meet on Sept. 12-13 to assess whether the recovery warrants an increase in record stimulus. Chairman Ben S. Bernanke will have an opportunity clarify his policy views in an Aug. 31 speech at a forum for central bankers in Jackson Hole, Wyoming.
Evans said today in a speech in Hong Kong that the central bank should begin a third round of bond purchases and continue buying until unemployment falls for at least six months.
Bond buying could “continue at a certain rate until there was clear evidence of improvement in economic conditions,” Evans said. “One example of clear evidence would be a resumption of relatively steady monthly declines in unemployment for two or three quarters.”
Gross domestic product will probably expand by about 2 percent this year while unemployment will remain above 7 percent through 2014, Pianalto said. Wage growth will probably be “slow,” while core inflation is likely to remain near the Fed’s 2 percent long-term objective “over the next few years.”
“The remarkably unusual economic environment we are in today calls for a highly accommodative monetary policy,” Pianalto said. “Even with the aggressive and extraordinary actions that the FOMC has taken, we remain in a frustratingly slow economic recovery. Our economy is still struggling to build momentum.”
The Fed has expanded its balance sheet with two rounds of bond purchases, known as quantitative easing. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage- backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.
The Standard & Poor’s 500 Index rose 0.2 percent to 1,414.31 at 1:37 p.m. in New York, while yields on the benchmark 10-year Treasury note fell 0.04 percentage point to 1.65 percent.
Policy makers must consider the risks of further actions and the “potentially adverse effects that our policy actions might impose on financial markets and the economy,” she said. While large-scale asset purchases have proved effective, she said that “at some point, the Federal Reserve’s presence in certain securities markets would become so large that it would distort market functioning,” according to the prepared text.
There are “limits to what monetary policy can accomplish,” she said, and it “cannot solve all of the economy’s problems.”
Pianalto, 58, has been president of the Cleveland Fed since 2003. She first joined the regional bank in 1983 as an economist in the research department.
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