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Cleveland Federal Reserve President Sandra Pianalto, a voting member of the central bank's policy making committee, said Thursday that extraordinarily low interest rates are necessary for an extended period in order to support a gradual economic recovery.
"The economy is anything but back to business as usual," said Pianalto, speaking to the Dayton Area Chamber of Commerce.
Her remarks echo those offered Wednesday by Fed Chairman Ben Bernanke in his semi-annual testimony to Congress.
With no threat of inflation on the horizon, Pianalto suggested the Fed has room to keep interest rates near zero to ensure an economic recovery that may "end up being one of the longest in our history."
Pianalto also stressed that the economy must not leave small businesses behind, noting that the economy cannot fully recover without a healthy small business sector.
Pianalto said that the strongest expansion in employment after each of the past two economic recessions came from small firms - many with less than 20 employees - which contributed to a rebuilding of the economy.
"Collectively, these statistics tell us that small business is in fact big business, and its impact is even greater because it remains one of the most innovative and flexible parts of the economy," she said in prepared remarks.
The Cleveland chief went on to stay that small businesses were hit especially hard during the 2008 financial crisis, particularly because of their exposure to the problems that hit the real-estate market during the crisis.
This is because of the direct nature of their business, such as construction, or because their buildings figure more prominently in their share of business assets, or because their personal property is often used to secure lines of credit," Pianalto said. "And don't forget that most community banks, which generally lend to small businesses, are actually small businesses themselves.
She added that that such conditions are making access to credit "especially challenging" for small businesses.
Speaking on ways to help small businesses recover and contribute to the re-growing of the U.S. economy, Pianalto said that the Fed is working with other regulatory agencies to issue new guidance to banks on small businesses and commercial real-estate lending, and encouraging banks to work closer with their customers during times of economic stress.
Pianalto added that lawmakers have proposed increasing caps on Small Business Administration loans to allow more lending to small businesses.
"So while there is no cure-all solution, there is widespread awareness at the policy level that helping to find solutions to the challenges facing small business is vitally important to our recovery," she said.
Pianalto's remarks come a day after Fed Chairman Ben Bernanke addressed the U.S. House Financial Services committee, saying that the economy would continue to recover slowly through the coming months.
Speaking on the economic outlook, Pianalto said that the recovery from the recession may be the longest recovery in the history of the United States
"While we are likely now in a period of recovery, it doesn't really feel much like one," she said.
Pianalto said that weak levels of demand are leading to excess capacity, which is leading to low sales at many business, which, in turn, leads to downsizing and a higher unemployment rate.
The Cleveland chief said that unemployment will remain a big concern during the fledgling recovery, adding that without a pickup in hiring, it will be harder for consumers to spend, and with consumers reluctant to spend, "hiring will remain subdued."
"All types of businesses are continuing to see weak levels of demand . . ." she said. "This in turn creates excess capacity, which leaves businesses having to decide whether to maintain or shut idle plants and offices. In such an environment, firms are being cautious about new hiring and so unemployment persists at a high level, which in turn restrains spending."
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