WEST PALM BEACH, Florida A top Federal Reserve official known for her centrist views on Monday detailed the potential risks posed by the U.S. central bank's quantitative easing program and argued they could be reduced by simply slowing the pace of asset purchases.
Still, Cleveland Fed President Sandra Pianalto said the unprecedented monetary policies have worked to boost economic growth and jobs and stabilize prices, and she repeated the Fed could begin slowing the pace of purchases if the labor-market outlook were to improve "sufficiently."
The central bank's balance sheet could swell to $4 trillion by year-end, she however noted, arguing that a smaller stable of assets "than many market participants currently envision" could mitigate potential risks.
"Given our limited experience with our asset purchase programs, slowing the pace of purchases could help minimize the potential risks associated with our large and growing balance sheet," she told the International Economic Forum of the Americas.
"Even continuing asset purchases at a reduced pace, and limiting the size of the overall program, would enable the Federal Reserve to continue adding accommodation and providing meaningful support to economic growth and job creation."
Frustrated with the slow and erratic U.S. recovery from recession, the Fed has kept interest rates near zero since 2008. In its third round of quantitative easing, known as QE3, the central bank is currently buying $85 billion in Treasury and mortgage bonds per month to encourage investment and hiring.
Last month, Pianalto, one of 19 policymakers at the Fed, surprised some observers when for the first time she floated tapering the pace of QE3 if the economy continues to improve.
On Monday, she further detailed the risks and uncertainties of running the Fed's balance sheet up to unprecedented levels, and of taking such large positions in bond markets.
The Fed has tied the duration of its bond-buying to achieving a "substantial" improvement in labor market conditions, and plans to keep rates near zero until the U.S. unemployment rate drops to 6.5 percent, from 7.6 percent last month.
Turning to the jobs report for March, a month in which a paltry and fewer-than-expected 88,000 new jobs were created, Pianalto called it "disappointing."
"I will need to see some more data before I can make any conclusions about the underlying strength of the labor market," said Pianalto, who does not have a vote on policy this year.
(Writing by Jonathan Spicer; Editing by Andrea Ricci)