Fed’s Pianalto Is ‘Encouraged’ by Results of QE2

Federal Reserve Bank of Cleveland President Sandra Pianalto said the Fed’s $600 billion bond purchase program has helped bring inflation expectations closer to the Fed’s goals.

“I voted to support additional asset purchases, and I am encouraged by some of the results so far,” Pianalto said today in a speech in Cleveland. “Inflation expectations moved closer to my longer-term inflation objective in anticipation of our announcement, and they have stayed that way.”

Pianalto joins other Fed policy makers in defending the central bank’s Nov. 3 decision to purchase $600 billion in Treasury securities through June to help promote economic recovery and prevent inflation from falling too low. The decision has drawn criticism from conservative economists and Republicans in Congress, including John Boehner, chosen as the next House speaker, who say it risks fanning inflation and asset bubbles and weakening the dollar.

“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,” said Pianalto, who is a voting member of the policy-making Federal Open Market Committee this year.

Rosengren, Bullard

Fed Presidents Eric Rosengren of Boston, James Bullard of St. Louis, Dennis Lockhart of Atlanta and William Dudley of New York defended the purchases earlier this week. Richmond Fed President Jeffrey Lacker told reporters Nov. 14 that “the risks exceeded the benefits” from further easing.

Pianalto said she disagreed with economists who have argued that much of the unemployment in the U.S. is structural, resulting from a mismatch in job openings and workers’ skills.

“Economists at my bank have studied this question, and they conclude that most of the rise in unemployment our country has experienced is cyclical,” she said. “The most important reason employers are hiring so slowly is that their business activity has been slow to pick up, not because there has been a sudden mismatch between worker sills and available jobs.”

Yesterday, the Labor Department reported that consumer prices, excluding food and fuel, increased by 0.6 percent in October from a year earlier, the smallest gain since records began in 1958. Chairman Ben S. Bernanke said last month that the Fed’s Open Market Committee aims for inflation of “about 2 percent or a bit below.”

Core Inflation

Pianalto said she expects core inflation “to remain quite 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,” she said.

Pianalto said she’s confident “the FOMC is well prepared to counteract” a buildup of inflationary pressure. “Consequently, I am not overly concerned that inflation will accelerate beyond my price stability objective of 2 percent.”

“The FOMC has experience dealing with inflation above our objectives, but we have no experience dealing with outright deflation, and I’d like to keep it that way,” she added.

On Nov. 23, the Commerce Department will increase its estimate for third-quarter economic growth to a 2.4 percent annual rate from 2 percent, according to the median forecast in a Bloomberg survey. Five consecutive quarters of economic growth have failed to push the unemployment rate below 9.4 percent.

Pianalto, 56, became president of the Cleveland Fed in 2003. Fed presidents rotate voting on monetary policy, with Pianalto voting every other year. She has never dissented from an FOMC decision.

To contact the reporter on this story: Joshua Zumbrun in Cleveland at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net