Fed's Pianalto Says Inflation 'A Key Risk'

Cleveland Federal Reserve Bank President Sandra Pianalto said on Tuesday that although core U.S. price measures were climbing faster than she wanted, Fed monetary policy was compatible with low inflation.

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"The core price measures in the United States are rising somewhat faster than I would prefer, and inflation presents a key risk to my outlook," Pianalto said in a speech in Paris.

Pianalto said some economists had questioned recent U.S. monetary easing given inflation pressures, but added: "I believe that the Federal Reserve's policy strategy remains compatible with a low and stable inflation rate."

The Federal Reserve lowered its benchmark federal funds rate on April 30 by one-quarter point to 2 percent in what may be the last in a series of cuts aimed at aiding an economy hit hard by a severe housing downturn and credit market turmoil.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote growth over time and to mitigate risks to economic activity," said Pianalto.

Pianalto, a voting member of the Federal Open Market Committee in 2008, said that as a policymaker she found herself in "a challenging environment." She said oil, agricultural goods, and many other commodities were experiencing "strong upward relative-price pressures," with the dollar's depreciation also helping to push relative commodity prices higher.

But she said globalisation should not prevent monetary policymakers from achieving price stability.

"Inflation is always a home-grown, monetary phenomenon that is ultimately under the control of a central bank," she said.

"Inflation can add noise to the price signals that inform our decisions and may lead people to make unsound economic choices," she added.

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