Federal Reserve Governor Kevin Warsh warned on Monday that any expansion of the massive amount of credit the Fed has pumped into the economy should be weighed carefully against the costs of doing so.
Warsh said that "some" believe that the Fed should do more to support the sluggish recovery, including buying more securities, as it did extensively during the financial crisis.
"Any judgment to expand the balance sheet further should be subject to strict scrutiny," he said in remarks prepared for delivery to the Atlanta Rotary Club.
The Fed's balance sheet has grown to around $2.3 trillion from about $900 billion before the financial turmoil as the central bank snapped up around $1.4 trillion worth of mortgage-related debt. The Fed launched its vast purchase program as a way to continue to stimulate economic growth after it had exhausted its conventional tool, the fed funds rate, by slashing it to near zero in December 2008.
No Fed officials have called publicly for an expansion of the Fed's purchases to support the recovery, which has looked shaky in recent weeks, although some analysts have recommended such a move.
In a statement following its meeting last week, the Fed said that the European debt crisis was undermining the pace of recovery. Most analysts expect the Fed's next moves will be to raise rates and shrink its balance sheet as the rebound strengthens.
Warsh repeated the Fed's language on the path of the economy, saying that recent data point to a modest recovery.
However, he said balance in financial markets is important to steady growth in the months ahead.
"If volatility in financial markets persists at elevated levels, fixed investment may disappoint," he said. "If, however, volatility levels across markets abate ... the recovery should continue apace."
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