WASHINGTON – A Federal Reserve official with close ties to Chairman Ben Bernanke expressed doubts Monday about whether the Fed’s new $600 billion bond-purchase program would succeed in boosting the economy.

Kevin Warsh, a Fed governor, also warned of “significant risks” associated with the program, including the potential for triggering excessive inflation later on.

The Fed’s program, announced last week, is intended to push interest rates on loans even lower than they are now. The Fed hopes cheaper loans will spur Americans to borrow and spend more. A stronger economy could, in turn, prompt companies to hire more and invigorate the economy.

But Warsh said he doubted the program will have “significant” or “durable benefits” for the economy. He made the comments in a speech to the annual meeting of the Securities Industry and Financial Markets Association in New York.

Despite his reservations, Warsh was among 10 Fed officials who voted for the $600 billion program. The sole dissent came from Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.

Warsh’s comments point to the uneasiness about the risks the central bank is taking with the new program — even among some Fed officials who supported it. Warsh, a Bernanke lieutenant, has never dissented from a Fed vote.

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Warsh warned that the Fed might have to reconsider its program if the dollar continues to fall or if commodity prices continue to rise, raising inflation across the economy.

The Fed last week said it will monitor the effect of the bond-buying program on the economy. It left the door open to scaling back the purchases if the economy grows more than expected or if high inflation becomes too much of a threat. On the other hand, the Fed indicated it would boost its purchases if economic conditions weakened.

“The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies,” Warsh said. “Given what ails us, additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies.”

Warsh suggested that Congress reform the tax code to provide more incentives for businesses to step up investment. He indicated that such an approach is a more effective way to strengthen the economy.

Hoenig and Warsh say they worry that the vast sums the Fed is pumping into the economy could unleash inflation. Bernanke, though, has argued that such fears are overblown.

 


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