November 19, 2010

Federal Reserve Bank of Cleveland President Speaks at Weatherhead, Talks Tough Decisions

Sandra Pianalto

Federal Reserve Bank of Cleveland President Sandra Pianalto doesn’t mince words about the fact that this month the nation's economy required some aggressive remedies.

“Today, the economy is growing and has officially emerged from the recession, but the recovery has been exceptionally gradual,” she said Thursday at Case Western Reserve University's Weatherhead School of Management. “Our economy continues to dig itself out of a deep hole.” 

Pianalto observed that while the economy is showing more signs of producing more jobs, it's not yet enough to reduce the jobless rate, now at about 9.6 percent. Pianalto said she doesn't expect the jobless rate to fall below 8 percent before 2013.

She came to the university to explain why she cast her recent vote for some unique strategies, including the Fed's plan to buy $600 billion in Treasury securities by the middle of next year as an economy boost.  

“I have to say that I can't recall a policy action that the Fed has taken that has received as much attention and vigorous debate as the decision we made at the Federal Open Market Committee meeting on Nov. 3,” she said.

“We know that our economy faces a multitude of challenges, and a full recovery will take some time. We also know that the Federal Reserve cannot solve all of the economy's problems on its own. But responding to inflationary and disinflationary pressures gets to the heart of what a central bank can and must do,” Pianalto said in classroom inside the Peter B. Lewis Building.

Case Western Reserve President Barbara Snyder delivered introductory remarks and talked about the roller-coaster ride of economic challenges the nation has faced in recent decades. Pianalto joined the Fed in 1983 as an economist in the research department.  She became the institution's president in 2003.

Pianalto's topic was timely: "Current Economic and Monetary Policy Issues." The talk focused largely on recent actions by the central bank to influence the availability and cost of money and credit to help promote national economic goals. 

In the weeks leading up to a crucial Federal Reserve meeting Nov. 3, markets were already anticipating further policy accommodation, she said, adding that doing nothing was not an option.

“My choice was clear,” she said. “I voted to support additional asset purchases, and I am encouraged by some of the results so far. For example, inflation expectations moved closer to my longer-term inflation objective in anticipation of our announcement, and they have stayed that way.”

The Federal Reserve Bank of Cleveland was established in 1914 as a part of the Federal Reserve System. It serves the Fourth Federal Reserve District, which covers Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. It is one of 12 regional Reserve Banks that, together with the Board of Governors in Washington, D.C., make up the nation's Federal Reserve System.

Pianalto took a series of wide-ranging questions from her classroom audience, and some Weatherhead faculty members also chimed in.

“It's a great opportunity for our students to hear from a person with a direct vote in making these decisions,” said Susan Helper, AT&T Professor of Economics at Weatherhead and department chair.  

An inactive work force "means erosion of the nation's productivity over time," Helper said.

Pianalto also discussed inflation expectations, which remain low. And she said there is a risk of deflation, which is another reason the Fed needed to take action.

“For some time, we at the Federal Reserve Bank of Cleveland have been assessing inflation expectation measures drawn from the broader financial markets,” she said, specifically referring to its inflation expectations model, which the Fed developed in collaboration with Peter Ritchken, Kenneth Walter Haber Professor of Banking and Finance at Weatherhead. 

“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,” Pianalto said.

Snyder closed the event by urging students to take up the assignment Pianalto suggested: Conduct research to come up with new models that help officials address unprecedented economic challenges.

Watch the video.

Posted by: David Wilson, November 19, 2010 10:30 AM | News Topics:

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