Cleveland Fed’s Pianalto Sees Limits of Monetary Policy, But Doesn’t Draw a Line

The president of the Cleveland Federal Reserve Bank, Sandra Pianalto, gave a speech today that pretty much sums up the recent actions taken by the FOMC, of which she is a voting member. In other words, essentially no action, but more “wait and see.” This is a sharp contrast to Chicago Fed President Charles Evans’s speech in Hong Kong in which he called for more action now.

Pianalto’s position is that the Fed has taken some large and unprecedented steps to deal with the financial crisis that hit the U.S. in 2008. She believes that near-zero interest rate funds and quantitative easing were critical to preventing further disaster:

I believe that we have responded creatively and aggressively to the financial crisis and the very deep recession. Indeed, this time, the Federal Reserve took unprecedented steps to avoid another Great Depression, and we have continued to aggressively pursue policy actions designed to promote economic growth while maintaining stable prices.

But there are limits Pianalto says:

While inflation remains close to our objective, unemployment is still well above the FOMC’s estimate of the longer-term normal rate. The monetary policy debate is whether the FOMC should take further actions to stimulate today’s slow-growth economy to bring down unemployment.

Monetary policy should do what it can to support the recovery, but there are limits to what monetary policy can accomplish. Monetary policy cannot directly control the unemployment rate. It can only foster conditions in financial markets that are conducive to growth and a lower unemployment rate.

Pianalto has a vote on the FOMC, while Evans does not. Her remarks almost perfectly outline the current Fed position going into the Jackson Hole meeting this week and the next FOMC meeting in mid-September. Basically, any improvement in the unemployment rate will be taken as evidence that the U.S. economy is improving on its own and the Fed should continue to sit on its hands. Wait and see.

Pianalto’s remarks are available here.

Paul Ausick