Fed Official: Government Bond Buying Could Cause Inflation

In a speech Monday, Federal Reserve Governor Kevin Warsh questioned whether the government's decision to spend $600 billion on bonds would have lasting positive effects on the economy, the Associated Press reported. The comments are somewhat surprising considering that Walsh, an ally of Chairman Ben Bernanke, voted for the plan.

Speaking at the annual meeting of the Securities Industry and Financial Markets Association in New York, Warsh said government bond buying could cause longer term inflation because of a weakening dollar and higher commodity prices. The government may be better off reforming the tax code to incentivize companies to boost investment, he added. "Additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies," he said.

Walsh's speech continues a long-standing debate about the effectiveness of the Fed's aggressive monetary policy. The Federal Reserve last week launched the second phase of its quantitative easing program, the so-called QE2.

Last month, Kansas City Federal Reserve President Thomas Hoenig broke ranks with some of his fellow regional Federal Reserve executives by warning against further monetary action, saying it would create currency volatility that would outweigh the potential benefits of lowering already low interest rates. Hoenig voted against last week's stimulus plan.