The Federal Reserve must do its part to boost a frustratingly slow recovery, a top Fed official said on Thursday, but low interest rates alone cannot get households spending again.
Our policy is appropriate in this economic environment; it is supporting a stronger recovery while ensuring that inflation remains consistent with our mandate, Federal Reserve Bank of Cleveland President Sandra Pianalto told the Rotary Club of Lexington, Kentucky. But in this economy, monetary policy alone cannot cure all of the economy's ills.
The Fed has kept short-term interest rates near zero for nearly three years, and has bought $2.3 trillion in long-term securities to help lower borrowing costs further.
Pianalto, who rotates into a voting spot next year on the Fed's policy-setting panel, said she expects inflation to fall to and stay at about 2 percent, the Fed's informal target, for the next two years.
That view suggests she sees little room for the Fed to undertake more easing, which may boost employment but could also lift inflation.
Monetary policy must do its part, and has been doing its part, to spur the pace of growth while staying consistent with our mandate for price stability, she said.
But the Fed, while well-equipped to keep inflation under control, does not play the predominant role in the labor markets, she said.
With household spending, and borrowing, likely to stay low because of worries over future income growth and efforts to trim household debt, she said, the U.S. economy will probably grow too slowly to put much of a dent in the unemployment rate.
The economy is likely to grow about 2.5 percent next year and 3 percent in 2013, she said.
Unemployment, now at 9 percent, could take quite a few years to fall to a level consistent with full employment, which she sees at about 6 percent.
Although Fed Chairman Ben Bernanke has held the door open to further easing to goose economic growth, Pianalto's remarks highlighted the limits of Fed action.
While the Fed's actions have supported the recovery, she said, other authorities must also take a role.
Beyond monetary policy, our economy would benefit from policies that help distressed households and from policies that give businesses greater clarity about taxes and regulations, she said.