A bumpy U.S. recovery and subdued inflation warrant the central bank's promise to keep benchmark interest rates low for an extended period, a senior Federal Reserve official said on Thursday.
Despite early signs of recovery, the economy is still facing some significant headwinds that will limit the rate of growth we can expect for the next couple of years, Cleveland Federal Reserve Bank President Sandra Pianalto told the Bonita Springs Chamber of Commerce.
She said two major headwinds facing the U.S. economy are prolonged unemployment and a heightened sense of caution among consumers and businesses.
Pianalto said that that caution is driven by a deep uncertainty about the direction of the economy and where the 'new normal' or baseline might be.
The U.S. central bank cut interest rates to near zero in December 2008 and has kept them there since to support the U.S. economic recovery. The Fed also took a number of extraordinary measures, such as buying $1.25 trillion of mortgage-backed securities, to further combat the financial crisis and unlock credit markets.
Pianalto, who is a voting member this year on the U.S. central bank's policy-setting panel, said that given this backdrop, timing the Fed's eventual tightening of monetary policy will be more complicated this time.
The unprecedented actions we took to cope with the crisis have created conditions that make it harder to simply put the process in reverse, she said.
She said it was crucial for the Fed to communicate clearly to ensure that it doesn't add more uncertainty to the mix.
(Editing by Chizu Nomiyama)