Fed gov cautious about bond purchases

In a speech at the Securities Industry and Financial Markets Association in New York, Warsh said, "Expanding the Fed's balance sheet is not a free option. There are significant risks that bear careful monitoring by the (Fed's) Federal Open Market Committee."

Warsh said the Fed risked pushing inflation beyond its own target rate, "if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices."

"The Fed's price stability objective might no longer be a compelling policy rationale," he said.

In addition, he said, the policy could cause protectionist response overseas. "Extraordinary measures tend to beget extraordinary countermeasures," he said.

Warsh said, overall, he rejected what is called "the new normal," which includes high unemployment and near-stagnant growth.

"Monetary policy can surely have great influence," he said.

However, "In my view, these risks increase with the size of the Federal Reserve's balance sheet," he said.

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