“Over time, the benefits of our asset purchases may be diminishing,” Pianalto said in a speech at Florida Gulf Coast University in Fort Myers, Fla.
“Given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past,” she said. “It is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.”
Fed officials are debating how long they should continue their bond buying, designed to foster economic growth and reduce 7.9% unemployment. The Federal Open Market Committee last month kept the monthly purchase pace unchanged at $40 billion in mortgage-backed securities and $45 billion in Treasury purchases.
The central bank has said the purchases will continue until the labor market improves “substantially.”
“In addition to the possibility that our policies may have diminishing benefits, they also may have some risks associated with them,” Pianalto said.
Financial institutions may take on excessive credit risk or interest rate risk from holding too much long-term debt, Pianalto said. Also, the Fed’s pace of bond purchases may disrupt financial markets and the central bank could slip up while withdrawing stimulus and allow too much inflation, she said.
“To minimize some of these risks, we could aim for a smaller sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting,” Pianalto said.
“This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will.”
The economy will probably grow 2.5% this year and about 3% in 2014, Pianalto said. Her outlook is more optimistic than that of private economists, whose median estimate in a Bloomberg survey was for 1.9% growth this year and 2.7% next year.
The pace of growth is “not strong enough to dig us out of the deep unemployment hole we’re in—at least, not for the next several years,” Pianalto said. She forecasts unemployment will fall to 7.5% by the end of 2013 and 7% by the end of 2014.
Fed presidents rotate voting on monetary policy with Pianalto, 58, not voting until next year. She is the longest- serving regional bank president, having led the Cleveland Fed since 2003.