Federal Reserve Bank of Cleveland President Sandra Pianalto said the labor market remains far from healthy even after employers added a greater-than-expected 244,000 jobs in April, and the central bank’s record monetary stimulus remains appropriate.
“Nine million jobs were lost in the recession, and we have added back only 1.8 million of those jobs in the past two years, which means that we still have a long way to go before labor markets can be described as healthy,” Pianalto said today in a speech at Xavier University in Cincinnati.
“Overall, my current outlook calls for the economic recovery to continue at a gradual pace over the next few years, with annual growth at just above 3 percent a year,” Pianalto said. “That is a fairly slow pace, considering how much ground we have to make up. For example, in my outlook, I expect it could take about five years for the unemployment rate to reach its longer-run sustainable rate of 5.5 to 6 percent.”
Fed Chairman Ben S. Bernanke and the Federal Open Market Committee are planning to complete their $600 billion bond purchase program in June and said last month that they will continue to hold interest rates “exceptionally low” for an “extended period.” They have yet to settle on a plan following the end of record monetary stimulus.
“Given my outlook, I think that the current stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the FOMC’s dual mandate of price stability and maximum employment,” she said. “In fact, my outlook for the economy that I have been discussing is based on the Committee keeping the federal funds rate close to zero for an extended period of time.”
Payrolls expanded by 244,000 last month, the biggest gain since May 2010, after a revised 221,000 increase the prior month, the Labor Department said May 6 in Washington. The jobless rate climbed to 9 percent in April from 8.8 percent the month before, the first increase since November, a separate survey of households showed. The jobless rate has been 9 percent or above for 22 of the last 24 months.
The number of people who filed for jobless benefits for the first time rose to 474,000 in the week ended April 30, for the most new filings since August, according to a separate report.
“These numbers highlight the slow pace of improvement in the labor markets,” she said. “Labor force participation is at low levels, which reflects a large number of discouraged workers who have simply given up on finding a job. I estimate that even at the end of 2013, the unemployment rate will be around 7 percent.”
Pianalto said in response to audience questions that the productivity boom in manufacturing meant that improving fortunes for manufacturers might not boost jobs. Manufacturing expanded faster than forecast in April, according to the Institute for Supply Management’s factory index, which fell to 60.4 last month from 61.2 in March. Readings greater than 50 signal expansion and the measure has exceeded 60 for four consecutive months, the best performance since 2004.
“The good news is that manufacturing is still strong in the United States and has been a source of strength in this recovery,” she said. “The bad news is we’re continuing to produce more with fewer people so it’s not necessarily going to be a source of job growth.”
The national average price of gasoline has risen 36 percent in the last year to $3.95 a gallon on May 9. Prices have fallen 3 cents from a week ago. The Labor Department reported yesterday that import prices rose 11 percent in April from a year earlier.
The Fed said such pressures will have only a “transitory” effect on overall inflation. The Labor Department said overall prices rose 2.7 percent in March and prices excluding food and fuel rose 1.2 percent. The Fed targets inflation of 2 percent or a bit below.
Pianalto said she agreed with the assessment of her colleagues that the pickup in inflation would prove “transitory”.
“The recent run-up in oil and other commodity prices has boosted inflation to an annualized rate of nearly 6 percent during the first three months of the year, but, like most of my colleagues on the FOMC, I do not expect inflation to remain above 2 percent beyond this year,” she said.
The central bank’s monetary policy will “eventually have to become less accommodative, and we have been developing the tools that we will use to exit from our current policy stance,” she said. “I am confident that we will be ready to use them when the time is right.”
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.