Fed’s Pianalto Says Fed Should Be ‘Cautious’ in Bond Buying

Federal Reserve Bank of Cleveland President Sandra Pianalto, who has supported record Fed stimulus, said she favored a reduction in bond buying last month because of the potential costs of the program.

“While to date the risks have mostly remained theoretical, I remain convinced that we need to be cautious in our expansion of asset purchases,” said Pianalto, who doesn’t vote on monetary policy this year and plans to retire early next year. “For me the improvement in labor markets seemed substantial enough to support a scaling back of the asset-purchase program at last month’s” policy meeting, she said.

Policy makers are debating how and when to start curbing record stimulus amid a deadlock over the federal government’s budget and a lack of agreement on raising the debt ceiling to avoid default. The Federal Open Market Committee at its next gathering on Oct. 29-30 will weigh the impact from the government’s partial shutdown as they debate tapering the $85 billion pace of monthly bond buying.

The U.S. economy is likely to continue its slow and steady progress “assuming the fiscal situation is resolved fairly soon,” Pianalto told the Economic Club of Pittsburgh. The FOMC was concerned last month with “the effects of restrictive fiscal policies” and “that the fiscal debate could add additional risk to financial markets and to the broader economy,” she said.

Taper Debate

Policy makers have been split on the impact of the shutdown for slowing of purchases, or tapering. Richmond Fed President Jeffrey Lacker said last week a government shutdown shouldn’t reduce economic growth permanently, while Atlanta Fed chief Dennis Lockhart said a lack of government data will make him “somewhat more cautious” in considering whether to slow the bond buying.

“I hope that the additional evidence that the committee is looking for arrives soon” that permits a slowing on purchases, Pianalto said. “Monetary policy can be powerful, but it has limits.”

The Cleveland Fed leader said she expects U.S. growth of about 2 percent this year, with expansion picking up next year, and a “gradual reduction in the unemployment rate.” Inflation, which has been below the Fed’s 2 percent target, is likely to rise to the objective, she said.

“Even when we ease up on the rate of new asset purchases, we will still be some distance from beginning to increase short-term rates,” she said.

The Fed has pledged for more than a year to press on with asset purchases until achieving sustainable gains in the labor market. The central bank announced a third round of quantitative easing in September 2012 to reduce longer-term interest rates, stoke economic growth and combat unemployment.

Pianalto, 59, is the longest serving of the Fed’s 12 regional presidents, having become leader of her district bank in 2003. During her 10-year tenure at the Fed, Pianalto was a reliable supporter of Fed Chairman Ben S. Bernanke, never dissenting from a FOMC decision.

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