The Federal Reserve should keep stimulating the economy even if looming budget disputes are favorably resolved and despite hints of improvement in employment, Atlanta Fed President Dennis Lockhart said on Friday.
The Fed announced a third, open-ended round of asset purchases in September that it says will continue until there is a substantial turnaround in the labor market.
"I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time even if fiscal cliff issues are properly addressed," Lockhart told University of Virginia Investing Conference.
"I hold to this view even though further growth of the Fed's balance sheet raises concerns of longer-term unintended consequences."
The U.S. labor market has provided some hopeful signs in recent months, but is far from full health, Lokchart said.
He expects the economy to grow only modestly above a 2 percent trend, adding that his forecast did not take into account the downside risks posed by the $600 billion "fiscal cliff" of expiring tax cuts and spending reductions set to take hold early next year.
U.S. gross domestic product expanded 2 percent in the third quarter, but there are worries that flagging business investment and Europe's worsening recession could lead to another soft patch.
Industrial output retreated in October, although the decline was in large part due to superstorm Sandy and its devastating impact on the U.S. East Coast.
"I have supported with my votes each of the FOMC decisions made this past year. I think that monetary policy is appropriately calibrated to give the U.S. economy its best shot at ongoing, or even accelerating, growth. A sustainable fiscal strategy would provide necessary further support to that process," Lockhart said.
However, he warned against any resolutions to the budget process that curtail an already fragile expansion.
"The chosen solutions should support continued growth. Any approach that compromises the continuation of the economic recovery will be, in my view, very damaging," he said.
It was an unusually blunt statement from a Fed official who most often refrains from making statements on fiscal matters.
And he warned he would do so at the very start of his remarks.
"Today I will venture more than usual into fiscal territory because, given the threats to the broad economy growing out of immediate fiscal concerns. It is unavoidable," he said.
In response to the financial crisis and recession of 2007-2009, the Fed slashed interest rates down to effectively zero and more than tripled its balance sheet to around $2.9 trillion.
Some analysts worry that the effectiveness of asset purchases have diminished with time, while others fear quantitative easing is boosting asset prices without doing much for the real economy.
(Timothy Ahmann in Washington. Editing by Andre Grenon)