UPDATE 2-Fed’s Pianalto sees gradual rebound, low inflation

(Adds comments from Q&A)

By Kristina Cooke

PITTSBURGH, May 18 (BestGrowthStock) – The U.S. economy will
recover slowly as stubborn unemployment curbs spending plans
and keeps inflation at bay, Cleveland Federal Reserve Bank
President Sandra Pianalto said on Tuesday.

“Our journey out of this deep recession will be a slow
one,” Pianalto told the Economic Club of Pittsburgh and the
Pittsburgh Stock and Bond Association. “In my view, this
outlook warrants exceptionally low levels of the federal funds
rate for an extended period of time.”

She said persistently high unemployment and overwhelming
cautiousness toward the future by both consumers and businesses
are major headwinds facing the recovery.

Pianalto stressed that inflation expectations remained well
anchored despite the Fed’s unusually loose monetary policy and
its sharp expansion of credit to the banking system.

In response to the worst financial crisis in generations,
the Fed slashed interest rates to nearly zero and put in place
a wide range of emergency lending facilities to prop up ailing
credit markets.

“Many of my business contacts continue to talk about wage
and price reductions, not increases,” she said.

A report published Tuesday showed producer prices,
excluding food and energy, rose just 1 percent for the year to
April, scraping against the lower bound of the Fed’s presumed
comfort range.

A new round of financial turmoil in Europe, led by worries
about Greek debt, has sparked a steep retreat in oil and
commodity prices that many analysts say is also broadly
disinflationary.

“I expect inflation to only gradually drift up from its
current low level but nonetheless remain subdued,” she said.
“Recent evidence I am seeing puts momentum on the side of
disinflation, at least in the short run.”

In a question and answer session after her speech, Pianalto
said that she would eventually prefer the Fed’s balance sheet
to shrink to a “more normal size and composition.”

The Fed’s balance sheet more than doubled to over $2
trillion during the crisis as the central bank bought
mortgage-related debt and longer-term U.S. Treasuries. The
Fed’s balance sheet has traditionally consisted of U.S.
Treasuries only.

Pianalto stressed that the balance sheet would have to be
shrunk gradually, so as not to disrupt financial markets and
the economic recovery.

Pianalto also briefly addressed the debt crisis in Greece,
which she said could be “another damper” on the U.S. economic
outlook.

The Greek crisis “should be a lesson to all governments,
including our own, that fiscal imbalances are unsustainable,”
she said. “We have our own fiscal imbalances issue to
address.”

Investing

For more stories on Fed policy go to [FED/AHEAD]
(additional reporting by Pedro Nicolaci da Costa)

UPDATE 2-Fed’s Pianalto sees gradual rebound, low inflation