Monetary policy cannot solve all the ills of the economy and while further actions could be beneficial, the Fed must be "realistic" about the costs, Federal Reserve Bank of Cleveland President Sandra Pianalto said Monday.
"Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish," Pianalto told a luncheon in Ohio, according to prepared text, released by the Fed. "Monetary policy cannot directly control the unemployment rate. It can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate."
Also, there are "significant obstacles" that policy cannot erase, she said, noting Europe's fiscal and banking problems. Moetary policy can not "put U.S. fiscal policy on a sustainable trajectory."
"There are benefits to further monetary policy actions, but we have to be realistic about what those benefits will be, how large those benefits will be, and how other factors will help or hinder the effectiveness of those benefits," Pianalto added. "We also have to consider the costs and risks of further actions. Such cost/benefit analyses are especially critical given the unique nature of both the current economic environment and the tools we are using to achieve our objectives. At the same time, such analyses are complicated by the fact that we have less experience assessing the costs and benefits associated with nontraditional policy tools."
The Fed, she said, acted "creatively and aggressively to the financial crisis and the very deep recession," taking "unprecedented" moves and "aggressively" pursuing "policy actions designed to promote economic growth while maintaining stable prices."
In the end, consumer and business spending are the keys to stronger economic expansion, she noted.
