Sandra Pianalto, President and CEO of the Federal Reserve Bank of Cleveland Speaks on the Current Economic Crisis and the Coming Recovery
By Pamela Weinsaft (New York City)
Economic recovery is likely to be “gradual and bumpy” according to Sandra Pianalto, the president and CEO of the Federal Reserve Bank of Cleveland. In her remarks to a packed house at the Market News International event on October 1st in New York City, she shared her thoughts on both the current economic conditions and the potential challenges on the road to recovery.
The Economy Was in Critical Condition
“My colleague Janet Yellen, president of the Federal Reserve bank of San Francisco, compared the economy to a hospital patient who was in the intensive care unit and only gradually stabilizing,” said Pianalto, adding that she believes that the economy was in “critical condition.” As evidence, she pointed out that the current recession has already lasted nearly seven quarters, almost four times as long as a typical two-quarter recession. “Even with today’s encouraging signs,” said Pianalto, “we have a lot of ground to make up before we even get back to the levels of output seen in 2007.”
Cleveland’s Federal Reserve Bank CEO also pointed to the low capacity utilization in the industrial sector, the drop in payroll employment—now “more than double the typical amount of an average recession”—and the increase in the unemployment rate, which is also more than double the rate usually seen in a typical recession, as evidence of the “considerable amount of slack” in the economy.
Despite Signs of Recovery, It is Too Early to Celebrate
“Nearly a year ago…I set out the three conditions that I would need to see as evidence that our economy is starting to recover. First, banks would have to begin lending to one another again and credit markets would have to operate without extraordinary involvement from the Federal Reserve and the Treasury. Second, home prices would need to stabilize. And third, the very low trading volumes in the private markets for mortgages, student loans, and auto loans would have to pick up,” said Pianalto.
She said that, although the “broader credit market conditions are tight and the level of overall lending continues to contract,” there has been some progress on the lending front due to increased confidence as a result of the actions taken by the federal government and certain financial institutions to build up capital on the banks’ balance sheets.
The housing sector is showing some signs of life as well, with housing prices inching higher and more new single-family homes being purchased. But, she added, that has come with “considerable government support.”
Pianalto added, “These are encouraging developments that are having a positive impact on the broader economy…I would not be surprised to find that when we look back a year from now, we will see the mid-summer marked the end of this recession. But it is far too early to celebrate. Our economy has, without question, taken a staggering blow.”
She expressed concern that the improvements seen were tied to short-term stimulus programs like the Cash for Clunkers and the first time homebuyer’s tax credit. “In my District, the effects of the “Cash for Clunkers” program are still showing up in higher auto production, along with increased demand for steel and other inputs. How long these effects will persist is certain, and it is still far from clear when normal consumer demand for autos will return…these incentive programs have boosted output in the current quarter—likely pulling activity forward into this year—and leaving a higher hurdle next year.”
She also acknowledged concerns about inflation. But, she added that, based on an examination of sticky-price goods, which some economists believe predict future inflation rates more reliably than those of other goods, she sees “tangible evidence suggesting that inflation will remain subdued.”
Pianalto said, “The financial crisis of the past two years has been a humbling experience for me as a Federal Reserve policymaker. Needless to say, the past two years have reinforced the fact that none of us can predict the future with certainty…Our economy must contend with a fragile financial system, a consumer sector that is more inclined to save than to spend, a labor market weakened by a lack of business confidence and the removal of many governmental supports for the economy. I expect to see a gradual and bumpy recovery as our economy addresses these challenges.”
“To stretch our medical analogy a bit further,” said the Fed Reserve policymaker, “the recovery from this critical condition will require a long convalescence.”