WASHINGTON - Cleveland Federal Reserve Bank President Sandra Pianalto Tuesday evening said that monetary policy is "appropriately positioned" in the face of a "frustratingly slow" economic recovery and modest inflation.

Pianalto, a voting member of the Fed's policymaking Federal Open Market Committee this year, did not specifically say whether she would support further monetary easing to counter what she called "headwinds" to stronger growth.

However, she indicated she is more encouraged about the outlook for inflation, despite the upsurge in oil prices, than she is about growth and employment.

Pianalto also warned it could take another four or five years to return to full employment of about 6% in remarks prepared for delivery to the Medina County Economic Development Corporation in Westfield Center, Ohio.

Most of her remarks were devoted to the regional economy, but she briefly addressed national macroeconomic challenges and the Fed's approach to them.

Unlike some of her more hawkish colleagues, Pianalto found no fault in the Fed's extended zero federal funds rate policy or its heavy purchases of bonds to hold down long-term interest rates.

Noting that the Fed has more than tripled the size of its balance sheet since 2008, Pianalto said, "Our objective in taking these alternative routes is to push down medium- and longer-term interest rates for consumers and businesses, and we have been successful in doing that."

"Even though we have introduced some new techniques, we are still operating to achieve our dual mandate of stable prices and maximum employment," she explained. "We still have to make policy decisions based on forecasts, and we still have to wait for the effects of monetary policy to work their way through the economy."

Despite the Fed's extraordinary efforts, Pianalto acknowledged that "the recovery from the recent financial and economic crisis has been frustratingly slow."

"A number of headwinds are holding back growth," she said. "Housing markets continue to be depressed. The government sector has been reducing spending and employment. Add to the mix the situation in Europe, which could negatively impact our exports."

"Given these numerous headwinds, I am expecting the economic recovery to remain moderate and for the economy to grow around 2 1/2% this year and about 3% next year," she continued.

"Given this outlook for economic growth, it could take as long as four to five years to achieve maximum employment, which I estimate to be consistent with an unemployment rate of about 6%," she added.

Pianalto said "the outlook for inflation is a little more encouraging."

"Both headline and core inflation slowed significantly from the first half of last year to the second half, and I expect inflation to remain close to 2 percent for the next few years," she said. "Still, the recent increases in oil prices and housing rents could complicate the inflation picture if they persist."

Pianalto said "we are ... in a challenging environment for monetary policymakers" since "we do not have a good deal of concrete history for monetary policy to fit our current circumstances."

But she said she is "confident the Federal Reserve is making the most of its tools to move the economy in the right direction."

"I think monetary policy is appropriately positioned to maintain stable prices and to support economic growth that will keep us on a path toward achieving maximum employment," she added.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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