UPDATE 2-Looking back, Pianalto praises U.S. Fed's stimulus

Wed Feb 26, 2014 8:51pm EST

(Adds comments on risks, future plans)

By Jonathan Spicer

Feb 26 (Reuters) - A long-serving Federal Reserve policymaker on Wednesday praised the U.S. central bank's use of both asset purchases and so-called forward guidance on interest rates as effective tools that have helped the U.S. economy recover from recession.

Sandra Pianalto, who is stepping down at the end of May after 10 years as president of the Cleveland Fed, said however the cost of those policies needs to be measured against possible market disruptions and financial instabilities.

"It's important for us to weigh those potential costs of a program like this ... against the benefits," she said at the College of Wooster.

In what is likely one of her last speeches as a monetary policymaker, Pianalto also predicted that new Fed Chair Janet Yellen would continue "building consensus and being open-minded" at policy-setting meetings in the years ahead.

Meantime, after leaving the Fed, Pianalto said she intends to work to improve education in her home state of Ohio, which has recently slipped by some measures.

To support the economic recovery from recession, the central bank has kept interest rates near zero for more than five years and is now buying $65 billion in bonds each month in its latest round of quantitative easing.

"Today we are in our third round of QE, and studies show that the asset purchases have succeeded in pushing down longer-term interest rates and have generally eased financial conditions," Pianalto said in her speech.

Turning to the Fed's promise to keep rates near zero until well after the U.S. unemployment rate falls below 6.5 percent, Pianalto said: "This unconventional tool has also proven itself effective."

The jobless rate currently stands at 6.6 percent.

The Fed has modestly trimmed its bond-buying program in each of the past two months, and it plans to raise rates some time next year as long as the economy continues to improve.

Pianalto, a Fed employee of more than 30 years, is a quiet centrist and strong backer of the aggressive monetary response to the 2007-2009 financial crisis. She has a vote on policy this year, though she has not dissented once in her time as a Fed regional president.

Addressing students and others at the college, which webcast her speech, Pianalto defended her voting record, noting that dissents have been very rare over the last decade.

The Fed's "nearly unanimous voting record is extraordinary given everything we have gone through since the financial crisis, severe economic recession, and ensuing slow recovery," she said.

Loretta Mester, director of research at the Philadelphia branch of the central bank, will succeed Pianalto on June 1. (Reporting by Jonathan Spicer; Editing by Leslie Adler and Lisa Shumaker)