Sandra Pianalto was named president and CEO of the Bank of in 2003. Today she has the most consecutive years of service among participants on the nation’s monetary policymaking body, the Federal Open Market Committee. And in 2012, she has one of the 10 votes on the Committee.

Alan Greenspan was chairman of the Federal Reserve when Pianalto started her current job. Now, presides over a group that has navigated the financial crisis and Great Recession. The tools of monetary policy have changed over the past few years, and so has the sense of urgency in employing them. We asked Pianalto to talk with Forefront about Interview with a range of issues—how she develops her policy views; her current economic out- Sandra Pianalto look; and the differences between Greenspan’s Fed and Bernanke’s. Mark Sniderman, executive vice president and chief policy officer of the Cleveland Fed, interviewed Pianalto on March 7, 2012.

34 Spring 2012 Sniderman: You have been a participant If you look at the transcripts, you’ll Therefore it’s not appropriate for on the Federal Open Market Committee see that oftentimes the conversation the central bank to set a numerical since 2003. How has the FOMC changed following his recommendation on objective for maximum employment. since then? policy would be, “I agree, Mr. Chair- The Federal Reserve can estimate the Pianalto: Probably the biggest change man,” “I agree, Mr. Chairman,” “I maximum level of employment given has been in the tools that we use agree, Mr. Chairman.” By contrast, the economic circumstances we face to conduct monetary policy. Our Ben goes last on the policy go-round. and then set policy that’s appropriate country has been through the deepest That requires each one of us to give for achieving an unemployment rate recession since the Great Depression. our views on appropriate monetary that is consistent with maximum We went through a financial crisis, policy, and Ben listens to our views employment. and monetary policy responded very and then presents his own perspective. aggressively and creatively, with some He then puts forward a recommen­ I have been a longtime proponent new ways of accomplishing traditional dation that he believes best reflects the of establishing a numerical objective objectives. appropriate course for policy, consistent with the views of the Committee. for the Committee. It helps anchor Also, we’ve changed the way we We then act on that recommendation. inflation expectati0ns. It provides communicate. We’ve continued to look for ways to enhance our com- Sniderman: Let me follow up on some- more certainty. munication with the public. We’ve thing else you mentioned—the state- Sniderman: Let me ask you about increased the number of times we ment the Fed issued about its longer- the way many people characterize share our economic projections term goals and strategies for monetary FOMC members, labeling some people with the public to four times a year. policy. I know this is a topic that you’ve as hawks and others as doves. Do you The chairman holds press briefings been interested in for a while. Can you think that’s a handy, simple way for following those meetings where we share some more thoughts about it? the public to understand policymakers’ release our projections. Pianalto: In that statement we, for the views? And where would you put very first time, agreed on a numerical In January, we took some truly yourself on that spectrum? objective for inflation. We said that historic steps in the way we commu- the Committee believes our mandate Pianalto: I’ve been part of the Federal nicate. We issued a statement on our for stable prices translates into an Reserve for a long time, more than longer-term goals and strategies for objective for inflation of 2 percent over 28 years. Those labels actually came monetary policy and we also, for the the longer term. I have been a longtime into play when there wasn’t agreement very first time, shared with the public proponent of establishing a numerical around an inflation objective. There our forecast for the rate. objective for the Committee. It helps were some members of the Committee I think these are tremendous strides anchor inflation expectations. It pro- who felt a higher rate of inflation was in the way we communicate with vides more certainty around the types appropriate. Those individuals were the public. of actions and policies the Committee dubbed doves. And there were some Finally, I would note the change in would deem appropriate to achieve that felt that we needed a lower rate of chairmen since I joined the committee that numerical objective of 2 percent inflation. In fact, one of my predeces- in 2003. was chairman for inflation. sors, Lee Hoskins, was focused on then, and now Ben Bernanke is chair. achieving zero inflation. And he was Inflation is a monetary phenomenon. And Ben has changed the way we considered a hawk. That’s why we’re actually able to conduct our meetings. You can read the set a numerical objective for it, and transcripts—I’m not sharing anything we should be held accountable for that’s confidential—but when Alan achieving it. Maximum employment, Greenspan was chair, he would usually which is the other half of our dual go first in our policy go-round, when mandate, is not primarily a monetary we take turns explaining our views. phenomenon. The maximum level of employment that our economy can achieve is determined by other factors, such as demographics, technology,

CHRIS PAPPAS and regulations.

F refront 35 Sandra Pianalto

Position Education President and Chief Executive Officer, The , BA in economics, 1976 of Cleveland The George Washington University, MA in economics, 1985 Former Positions Select Civic Associations Economist, Federal Reserve Board of Governors Past Chair and Life Director, United Way of Greater Cleveland Economist, U.S. House of Representatives Budget Committee Board Member, Cleveland Foundation Board Member, Greater Cleveland Partnership

We now have agreement and a state- I think we have to strike a balance, and When you ask how I can determine ment by the Committee that 2 percent I think we have a good balance with whether our policy accommodation is the appropriate level of inflation. our current policy. has been effective, you can look at So I don’t think the titles of hawks and the path of medium- to longer-term Sniderman: It’s clear the economy is doves are useful when the Committee interest rates, and they have been growing and the unemployment rate has stated that we have a 2 percent brought down significantly. On the is coming down, but the pace of im- inflation goal. mere announcement that we were going provement is still slow. You’ve said in to be purchasing mortgage-backed If there are titles that people want speeches that you think the Fed’s extra­ securities, mortgage rates fell almost to use, I would like to be labeled ordinary actions have been successful. 100 basis points. Those are the rates someone who is open-minded. Or What gives you that confidence that at which consumers and businesses someone who is pragmatic. We’ve the policy approach is actually making borrow. By bringing those rates down, been through some very unusual a difference? we are providing stimulus to the circumstances. We’ve had a lot of Pianalto: In more normal times, economy by encouraging consumers unexpected changes in economic the main tool we use in conducting and businesses to borrow money, and circumstances that have required us to monetary policy is adjusting the that translates into more spending. think differently about the appropriate , our target rate. path for monetary policy. So I tend Back in 2007, when the economy was Sniderman: Is there any way from to feel very comfortable being open- entering into a recession, we began history to try to get a sense of whether minded and not dogmatic or being to lower the feds fund rate, and we that was the right thing to do or not? an ideologue on appropriate policy. continued to lower it until 2008 when Pianalto: I think we have a very good I’ve been open-minded to changes we brought it down to near zero, example of not having been accommo­ in policy as economic circumstances where it stands today. We felt that the dative at a time when the economy have changed. economy still needed further accom- needed more accommodation. That Sniderman: Let’s talk more directly modation, so we used some new tools was the Great Depression. It took us about current circumstances. If inflation [such as long-term asset purchases, quite a bit of time, a lot of studying, is near our goal right now, why not try otherwise known as “quantitative to understand that the Federal Reserve to go faster and get that unemployment easing”] in providing accommodation. was not providing enough policy accommodation during that time. The rate down sooner? When we adjust the federal funds target Federal Reserve’s restrictive monetary Pianalto: We always have to stay rate, the rates at which consumers and policy contributed to making what focused on a balanced approach. I businesses borrow are also affected. might have been a severe recession into would be concerned that if we were When we were bringing down the the prolonged, 10-year downturn that to provide even more policy stimulus, fed funds rate, medium-term and we now know as the Great Depression. given my current outlook, we could longer-term rates also came down. In That was a good lesson for us. And I risk an unwelcome rise in inflation. using our new tools, we have the same think we learned from that episode, and On the other hand, if we were to objective of lowering rates at which we have responded more aggressively remove our policy accommodation too consumers and businesses borrow. to the most recent severe recession. quickly, I would be concerned that we would risk slowing the economy and causing an unwelcome disinflation.

36 Spring 2012 Sniderman: You suggested that maybe Sniderman: It is remarkable the number it’s not such a good idea to be pushing of employers who will tell you that so hard on monetary policy because the jobs they have open used to be there’s an inflation risk. But clearly the filled by high school graduates. Now, unemployment rate is very high. Are at a minimum, those jobs require an there some other factors at work keeping associate degree or something like that. that unemployment rate up? Pianalto: Yes, in fact, even the manufac­ The data show that where we’ve seen Pianalto: I still believe that our current turers I talk with say that for entry-level gains in manufacturing jobs, it’s been high unemployment is a cyclical jobs, they’re requiring at least two problem and not a structural one. years of post-high school education; in occupations that require a four-year There’s been a longstanding relation- some additional training. The data college degree. And in occupations that ship between the amount of growth show that where we’ve seen gains require high school or less, jobs have in the economy and the improvement in manufacturing jobs, it’s been in that it translates into in terms of job occupations that require a four-year actually declined. creation. We’ve had a very weak college degree. And in occupations recovery that hasn’t created a lot of that require high school or less, jobs of the very challenging economic jobs. So the slow pace of this recovery have actually declined. So yes, this environment that we’ve been through, is causing that unemployment rate to is another important factor that’s consumers have more difficulty move down more slowly than we’d like. affecting our labor markets. obtaining credit. Their credit scores I’m reassured that this issue is cyclical Sniderman: Let’s turn attention to may have been lowered. So this trans- and not structural when I look at job another place that’s a notable headwind mission mechanism that monetary openings. Prior to the recession, there in the expansion, and that’s the housing policy operates through has been were two individuals looking for every sector. Do you think it’s appropriate for blunted somewhat. job that was open, so it was a 2-for-1 the Fed to be purchasing government- We have to look at other ways of ratio. During this recession, that guaranteed, mortgage-backed securities addressing some of these issues. The number has jumped to four people to strengthen the housing sector? Board of Governors recently sent looking for every one job opening. What are some other roles the Fed can Congress a white paper with some So we just have a very slow pace of job play to try to get the housing sector to options about how we can address openings, which, again, is cyclical, in heal more quickly? some of the challenges that we’re my thinking. Pianalto: In almost all previous recov- facing in the housing market. The But we’re also finding that it’s taking eries, investment in housing has been options range from some loan longer to match the skills that people positive and has helped the recovery. modifi ­cation programs that might be have to the skills that are needed in Unfortunately, in this recession, invest- available, to taking homes that are in available jobs. It may be that because ment in residential construction has foreclosure and now owned by banks these jobs require more training, more actually declined, so it’s been a drag. and turning them into rental properties. I hope that Congress can have some skills, more education, it is taking a Monetary policy has helped the situa- debates around these various options little more time to make a match. That’s tion by bringing down mortgage rates, and come to some policy decisions another reason why it’s taking longer and that has made housing more that will help the housing market. to bring the unemployment rate down. affordable to many consumers. But we’re in an unfortunate circumstance in that not everyone can take advantage of these lower interest rates. Because of depressed housing markets, we’ve had consumers lose a lot of wealth that was associated with housing. And because

F refront 37 Sniderman: If we get into the summer Sniderman: Well, it’s certainly been a My forecast for either economic growth and begin to see another one of these challenging period for the Fed, as you’ve patterns of the economy slowing down, mentioned—unconventional actions, or inflation would have to change for me do you think that would be the time unconventional economic circumstances. to want to make a change in the stance to support further easing in policy and And certainly the Federal Reserve has of monetary policy. maybe be willing to take a little more attracted its share of skeptics and risk on the inflation side of things in critics, it seems, on a number of different

Sniderman: Some of the most recent order to get the economy moving again? dimensions. Policy is too tight, too easy, indicators show some signs of improve- Pianalto: Right now my forecast is for too much risk of inflation, not willing ment in the pace of the expansion. the economy to grow a little more than to take enough risk to get the unemploy- Are you feeling more upbeat today than 2.5 percent this year and 3 percent ment rate down, and so on. How do you were a year ago or even six months next year, with inflation staying close you feel about all of the controversy ago about the economy’s prospects? to 2 percent. My forecast for either surrounding you as a voting member this year? Pianalto: I want to see more evidence economic growth or inflation would that the good economic data that we’re have to change for me to want to make Pianalto: When you are in such seeing is more than transitory, that a change in the stance of monetary unusual circumstances and you’ve been it is sustained. We’ve seen two other policy. Given my current outlook for through the challenges we’ve been episodes in this recovery­—in early the economy, the current stance of through as a country, it’s not surprising 2010 and then again in 2011—where monetary policy is appropriate. If my that you’re going to have diverse views we thought the economy was gaining forecast were to change significantly, on how to address these issues. As some momentum only to be disap- then I would want to look at the appro­ I mentioned earlier, I want to have an pointed later on by addit­ional factors, priate policy response, and perhaps open mind about the appropriate such as the European debt crisis, and make an adjustment to my monetary policy approach, so I do read various issues around the tsunami in Japan policy stance in response to a change people’s views and opinions about our that disrupted supply chains in the in my forecast. policy actions. I listen very carefully to my colleagues’ views on appropriate auto industry, and so forth. I’m being Sniderman: In that context, some policy responses given current a little cautious about saying that this people say the Committee is being economic circumstances and our stronger economic data that we’re maybe way too conservative about the current outlook. And then I make a seeing is going to be sustained. I’d like inflation risk and that the emphasis on judgment about what I believe should to see a little more evidence of that price stability is holding the economy be the appropriate monetary policy strength. back from getting this unemployment response. Having said that, one difference that rate down. What is your view? I’m seeing this year from the two Pianalto: I think it’s important for us Sniderman: What are some of the things previous episodes where we started to to maintain low and stable inflation in you’ve learned over time in terms of see some strengthening in the economy order for the economy to grow. I think how you approach decision making? is that the employment picture does our two objectives are complementary. Pianalto: When you’re part of the look to be stronger. We’ve now had We’ve learned over a long period of process that creates these new tools and several months of good employment time that a low and stable inflation rate implements them, you clearly are much numbers. In conversations I’ve been actually is necessary for longer-term more familiar with them. It’s almost having with businesspeople, they economic growth. So I think it is appro­ like, rather than going back and reading sound more optimistic. This time the priate for the Fed to stay focused on a textbook, you’re actually writing the optimism is being supported—it’s maintaining a low and stable inflation textbook. Therefore, because you’re not just a feeling; they’re actually rate near our 2 percent objective in actually doing it, you feel much more seeing stronger orders, and they are order to provide an environment for knowledgeable about it—you’re the responding to those orders by doing the economy to grow, and therefore expert. more hiring. That’s why I think we’re for employment to grow, for jobs to seeing stronger numbers on the be created. employment front.

38 Spring 2012 Sniderman: Maybe it’s the difference between someone handing you a tool and saying, “Here, use this,” versus having a problem and then you have to create the tool to help you solve the problem? Pianalto: With the first couple of years on the Committee, I recall thinking about what other Committees did when they faced these types of circumstances. But in the past few years we have been facing a set of circumstances that very few previous Committees had to deal with. So I no longer had the luxury of thinking about what other Committees did. I turned my attention more towards creating the policy response to these circumstances. It’s a different approach. I spent less time thinking about, “what do I need to learn from others?” Rather, I had to focus on being helpful in creating the response. I’m sure that I’ve gained wisdom by going through this episode. That wisdom will be helpful, I’m sure, in responding to challenging circum- stances in the future. ■

Watch video clips from this interview www.clevelandfed.org/forefront

Recommended reading Sandra Pianalto. 2011. “Price Stability: Why We Seek It and How Best to Achieve It.” Forefront, Federal Reserve Bank of Cleveland (Spring).

Speech transcripts For transcripts of President Pianalto’s speeches, visit www.clevelandfed.org/For_the_Public/News_and_Media/Speeches

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