Warsh warns on risks of Fed bond buys

NEW YORK (BestGrowthStock) – Federal Reserve Board Governor Kevin Warsh on Monday expressed doubts that the U.S. central bank’s new bond purchase program would do much to help the economy.

“I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy,” he said in remarks prepared for delivery to a conference sponsored by Wall Street’s top lobbying group.

Warsh, expanding on an opinion piece he wrote that appeared in the Wall Street Journal on Monday, said the risk-reward trade-off for Fed actions was most favorable when the economy was in crisis and the central bank had ample tools to help.

“But when nontraditional tools are needed to loosen policy and markets are functioning more or less normally — even with output and employment below trend — the risk-reward ratio for policy action is decidedly less favorable,” he said.

“In my view, these risks increase with the size of the Federal Reserve’s balance sheet,” Warsh added. “As a result, we cannot and should not be as aggressive as conventional policy rules — cultivated in more benign environments — might judge appropriate.”

The Fed last week announced plans to expand its balance sheet by buying a further $600 billion in governments bonds, building on the $1.7 trillion in Treasuries and mortgage-related debt it bought to temper the impact of the financial crisis.

“Expanding the Fed’s balance sheet is not a free option,” Warsh said. “There are significant risks that bear careful monitoring,” including the possibility that price pressures build more quickly than the central bank expects, he said.

(Reporting by Kristina Cooke; Writing by Tim Ahmann; Editing by James Dalgleish)

Warsh warns on risks of Fed bond buys