Pianalto Says Fed’s TALF Will Be Big Help for Economy (Update1)

Feb. 18 (Bloomberg) -- Federal Reserve Bank of Cleveland President Sandra Pianalto said the central bank’s new $1 trillion program to prop up markets for auto loans and other debt will make a “big difference” in strengthening the U.S. economy.

The Term Asset-Backed Securities Loan Facility, known as the TALF, is likely to start operating “within the next few weeks,” Pianalto said in a speech today in Columbus, Ohio. The Fed and Treasury last week said they may expand the program from its initial $200 billion and support commercial mortgage-backed securities.

“We believe this intervention to support credit markets will make a big difference in stabilizing the economy,” Pianalto, who doesn’t vote on monetary policy this year, said in remarks to a group of commercial real-estate developers.

The central bank, aiming to unfreeze credit and end the longest recession since 1982, is using emergency authority to create money while putting home loans and other assets on its balance sheet.

U.S. gross domestic product will probably “decline sharply” in the first half before a “modest upturn” in the second half, with the jobless rate rising through the end of 2009, she said. The economy will contract 2 percent this year and the unemployment rate will exceed 8 percent, according to the median estimates in a Bloomberg survey of analysts.

Stability Return

“I don’t expect things to get better until we see stability return to the housing and financial markets,” Pianalto said. While recessions linked to financial turmoil tend to be “longer and more severe than typical recessions,” Pianalto said she’s confident that “this recession will certainly end” like those in the past.

Pianalto, 54, has been president of the Cleveland Fed since February 2003, giving her the third-longest tenure among the 12 district-bank presidents. She has always voted with the majority on Federal Open Market Committee interest-rate decisions.

The U.S. lost 598,000 jobs in January, the most in 34 years, and the unemployment rate jumped to 7.6 percent, the Labor Department said on Feb. 6.

Fed Chairman Ben S. Bernanke, by advancing the TALF expansion, is aiding Treasury Secretary Timothy Geithner in the government’s revised financial-rescue plan. Separately, the Fed is buying $600 billion of debt sold by government-backed mortgage finance companies and mortgage-backed securities they guarantee.

Other emergency-lending programs have swelled the Fed’s balance sheet by more than $1 trillion since December 2007, including the Term Auction Facility and commercial-paper backstop.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Anthony Massucci in Columbus at amassucc@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net