NEW YORK – The Federal Open Market Committee was justified in taking the “unprecedented step” of saying it will hold rates down for another two years, according to Federal Reserve Bank of Cleveland President Sandra Pianalto.
“Our outlook could change, of course, but right now the Committee anticipates that it will be at least mid-2013 before we increase our federal funds rate target. Under the circumstances, I think it made sense to take the unprecedented step of including that conditional guidance in our press statement,” she told the Community Banks Association of Ohio Friday, according to prepared text of her remarks, which were released by the Fed.
“In the week leading up to our meeting, most market participants had already fixed on mid-2013 as the time when we would begin to raise our federal funds rate target. So, you might ask, how does being more specific about our monetary policy intentions make any difference? I expected that the announcement would push interest rates down along the yield curve, especially in the middle range of maturities, as a result of changing the expectations of those who thought a rate increase would come sooner, and by providing more certainty for everyone. The result of our action has been consistent with what I had anticipated.”
Pianalto said while “monetary policy alone cannot cure all of the economy's ills,” monetary policy must do “what it can to promote a stronger economic recovery in the context of price stability.”
History tells us this recovery should have produced a 10% rise in real GDP in the first year of recovery, rather than the 3.3% it showed. Pianalto noted the nation hasn’t returned to pre-recession economic activity yet.
“The unusual combination of forces that caused the recession is also making the exact course of the recovery difficult to forecast,” she said. While in early 2010, it looked like recovery was taking hold, by summer “dark clouds appeared on the horizon in the form of a weakening recovery and falling inflation.”
Again this year an early promise of recovery stalled.
Pianalto sees the economy growing just 2% this year and 3% in each of the next two years, but inflationary pressures will abate, averaging “2% or a bit less” in each of the next two years.
