Various information will be used by the Fed to determine when to raise rates, Federal Reserve Bank of Cleveland President Sandra Pianalto said Thursday.
"The Committee will take into account a wide range of information in determining how long to keep the target federal funds rate low. We will be watching labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," she told a group in Dayton, Ohio, according to prepared text of her remarks, released by the Fed. "It is a complicated world out there, and no single data point will determine our next move."
Unemployment remains too high, and too many people can't find full-time jobs, and others have given up their search, all of which are "a significant concern."
The economy is falling short of the 2% inflation target. "Low inflation might sound like good news, but today it is also a sign of an economy that is not firing on all cylinders. The big risk is that persistently low inflation could tip into deflation, which is when the level of prices actually falls. When deflation happens, businesses and consumers put off spending and investment because they are waiting for even lower prices, which is bad for the economy," she said.
As a result of high unemployment and low inflation, "monetary policy remains very accommodative. Even though we are scaling back our asset purchases, we are still buying a sizable amount," Pianalto said. "At this point, we have accumulated about $4 trillion worth of securities-which is four times the size of the Federal Reserve's balance sheet six years ago before the financial crisis and recession. These sizable asset holdings should continue to maintain downward pressure on interest rates."
She continued, "The FOMC has also indicated its intent to keep the target federal funds rate exceptionally low in order to continue to make progress on both maximum employment and inflation."
Pianalto expects GDP growth of 3% this year and an unemployment rate of 6.2% by year end. "And I project that accommodative monetary policy, a strengthening economy, and stable inflation expectations will bring inflation back to our 2 percent objective over time, but I expect that progress to be slow."
