Austerity budgets can stymie the moderate recovery the U.S. is experiencing and while accommodative monetary policy has fueled the recovery, fiscal restraint can tamp it, Federal Reserve Bank of Cleveland president Sandra Pianalto said Monday.
"The threat of fiscal austerity in the U.S. and in other countries around the world represents a near-term risk to the global economic recovery," she said in a speech in Florida, according to prepared text of her remarks, released by the Fed. "Large debt obligations in many countries present risks to long-term economic growth."
Specifically, the U.S. economy's success "will depend considerably on fiscal policy." Across-the-board spending cuts will slow near-term growth. "The challenge is for fiscal policymakers to enact a credible plan that will put the U.S. federal budget on a sustainable long-run path without adversely affecting the recovery."
"Today, the U.S. economy continues to recover at a moderate pace, but unemployment remains unacceptably high. Monetary policy is supporting economic growth, but monetary policy has limits. In current circumstances, it would be particularly helpful if fiscal and regulatory policies were among the forces supporting economic growth," Pianalto said. "Central banks worldwide are facing economic circumstances that are similar to those in the U.S., and are taking innovative monetary policy actions that may influence the theory and practice of monetary policy in years to come. I believe that our accommodative monetary policy stance is keeping the U.S. economy on the path of economic recovery, and is contributing to both U.S. and worldwide economic growth. But we are in uncharted waters. So, it is important that we continue to evaluate the risks associated with our policy actions."
Pianalto said the pace of asset purchases could be slowed if the "labor market condition" outlook "improve[d] sufficiently." "But other considerations could lead to the same result. The unusual size and nature of the FOMC's asset purchases also require us to consider risk factors that do not figure so prominently during ordinary times."