NEW YORK – The federal Reserve should promote price stability to get the economy moving, according to Federal Reserve Bank of Cleveland President and CEO Sandra Pianalto.
“My belief is that by promoting price stability, the Federal Reserve is following the best course for supporting the economic recovery,” she told a Case Western Reserve University audience Thursday, according to prepared text of her speech, which was released by the Fed.
Additionally, Pianalto said economists at the Cleveland Fed have determined that “most of the rise in unemployment” in the U.S. has been cyclical, meaning because business is slow, rather than “a sudden mismatch between worker skills and available jobs.”
Inflation, she noted, should remain subdued through 2013. “Although I do not expect an outright decline in the general level of prices, with demand in the economy still weak and unemployment so high, further disinflation remains a risk to my outlook<” she said. “I take this risk seriously, because in periods of significant economic slack, very low inflation risks tipping into deflation. Admittedly, deflation is rare in the modern experience of industrialized economies. Nevertheless, Japan’s economy has been struggling for several decades, and scholars point to deflation as a root cause.”
Pianalto said enough negative risk to growth and disinflation existed to push her to support the quantitative easing approved at the most recent Federal open market Committee meeting, despite the risks of an undesired increase in inflation and inflation expectations and any unintended consequences of these large-scale Treasury purchases, such as asset price bubbles.
“I think our policy action offers the right kind of insurance that the Federal Reserve’s monetary policy will support the economic expansion while stabilizing inflation and inflation expectations consistent with our price stability mandate,” she said.
