Pianalto: Evidence Expansion is Becoming Self-Sustaining

NEW YORK – The economy is improving “gradually” and despite uncertainty, there is evidence the recovery is becoming “self-sustaining,” Federal Reserve Bank of Cleveland President and CEO Sandra Pianalto said Monday.

The jobs market is improving, households have cut their debt and banks improved their asset quality, and increased lending, she said.

“Despite these signs of progress, the economy still faces a number of headwinds,” Pianalto told the Economic Roundtable of the Ohio Valley, according to text released by the Fed. “Housing markets are still in distress throughout much of the country; state and local governments are still in the process of adjusting to budget pressures; and rising gasoline prices are likely to restrain household spending.  Furthermore, strains in European financial markets continue to pose downside risks. For all these reasons, businesses and households remain cautious about the future.”

Pianalto sees growth of 2.5% this year and 3% next year, with inflation near 2 percent for the next few years. “At this moderate pace of growth, it could take as long as four or five years for the unemployment rate to fall to the 6 percent rate that I judge to be consistent with maximum employment.”

However, she noted the recent spike in gas prices and said that “could complicate the inflation picture if it persists.”

The Fed’s statement that it expects to keep short-term interest rates at exceptionally low levels at least through late 2014 “is not a commitment to keep the federal funds rate at its current level until late 2014,” Pianalto said, “rather, it is an expression of what the Committee judges to be the earliest time that we would likely raise interest rates based on our current economic outlook.”

She continued, “I believe that our accommodative monetary policy has put the economy on a path, albeit gradual, that will achieve our maximum employment objective while maintaining price stability. Trying to accelerate the pace of economic growth by easing monetary conditions further could put the Committee’s price stability objective at risk. Alternatively, removing policy accommodation prematurely could risk breaking the momentum of the expansion and causing disinflation. With my current outlook, I think our policy stance is still the one best suited to foster steady gains in output and employment and to maintain stable prices. I am, of course, always adjusting my projections as new information becomes available, and my view of appropriate monetary policy may need to be adjusted if there are substantial changes to my outlook.”

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