2012.05.31 18:29:49 UPDATE: Fed's Pianalto: US Monetary Policy Appropriate For Conditions

--Cleveland Fed president: Bank directors provide valuable info on economy --Adequate safeguards in place to shield regional banks from conflicts with directors, Pianalto says --Adds lower energy costs aiding U.S. manufacturing improvement (Updates with additional comments on U.S. employment outlook beginning in the 14th paragraph.) By Bob Tita Of DOW JONES NEWSWIRES CLEVELAND -(Dow Jones)- A Federal Reserve Bank president said Thursday adequate procedures are in place to keep bankers serving as directors of regional Fed banks from influencing Fed supervision of their banks. Sandra Pianalto, president of the Cleveland Federal Reserve Bank, said she depends on bank executives who serve as directors of her bank to provide frequent and timely information about economic conditions. "It's important information that I get," she said during a remarks to reporters following a speech at a Cleveland conference for the National Association for Business Economics. Regional Fed bank boards have been in the spotlight since Sen. Bernie Sanders (I., Vt.) introduced legislation last week that would prohibit bankers from serving as directors for regional Federal Reserve banks. Sanders described the current arrangement as a blatant conflict of interest because the Fed is responsible for regulating banks whose executives serve as directors of Fed banks. The Federal Reserve system has 12 regional banks. Each one has its own board with nine directors who come from outside the central bank system. Commercial banks that belong to each regional bank district elect six of the nine board members and the Fed's Washington-based Board of Governors appoints the remaining three. Pianalto declined to comment directly on Sanders's bill, but said she's confident that no conflict exists between the Fed's supervisory activities and the bankers serving as Fed bank directors. "Policies are in place that protect supervisory information" from bank directors, she said. Pianalto said she supports recent procedural reforms that barred bankers from selecting their regional Fed bank presidents. "We have appropriate policies in place that bank directors are not involved" in the selection of Fed bank presidents, she said. Pianalto's sentiments appeared to be in line with those of Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, who last week said it would be a mistake to banish banking executives from the boards of regional Fed banks. Sanders's push to change the board structure of the regional banks came in the aftermath of J.P. Morgan Chase & Co.'s (JPM) disclosure of more than $2 billion in trading losses from bad investments at a time when Chief Executive James Dimon is serving on the New York Fed's board. Sanders has said Dimon's presence on the New York Fed board exposes the bank to speculation that Dimon could influence the bank's regulatory actions toward J.P. Morgan. Pianalto, a voting member of the monetary policy setting Federal Open Market Committee, said the Fed's current monetary policy remains appropriate for the performance of the U.S. economy. She expects the U.S. economy to grow by 2.5% this year and by 3% in 2013 and 2014. She said the sluggishness in U.S. employment is not an indicator that the U.S. GDP expansion is stalling. "One month, or even a couple of months, of [weak] job data isn't changing my outlook that the economy will continue to expand," she said. She added that it may take as long as five years for the U.S. unemployment rate to drop to the 6% level widely considered as a full-employment level. Nevertheless, Pianalto said she's convinced that persistently high unemployment, especially in the manufacturing sector, is a lingering side effect of the severe economic recession in 2008, rather than a structural change in the U.S. economy that will result in fewer available jobs going forward. She said low natural gas costs and a U.S. work force with improved skills have made the U.S. more competitive as a location of job creation and investment in capital equipment. She added that overall U.S. production capacity remains 6% lower than in 2007, suggesting that companies have lots of catching up to do after closing plants and scaling back production during the recession. -By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com (END) Dow Jones Newswires May 31, 2012 12:29 ET (16:29 GMT)