Dallas Fed President Richard Fisher, a top Federal Reserve official, said on Tuesday the U.S. central bank could get into trouble if it doesn't set a limit on the amount of assets it is willing to buy.
But Fisher, a critic of easy Fed policy, also said his main concern now was unemployment, not inflation.
He said another option the Fed might consider to signal its aims to markets was a target for unemployment, although this would be difficult because monetary policy alone was not responsible for creating jobs. Fiscal policy was also key.
Fisher kicked off his speech at a conference in Berlin with a reference to German policies in the 1920s that led to hyperinflation, saying that while inflation was not his main concern now, unlimited quantitative easing was risky.
"You cannot expand without limits without horrific consequences," he told reporters on the sidelines of the conference organized by the Levy Economics Institute. "There is no infinity in monetary policy, we know that from the German experience."
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.
A self-described anti-inflation hawk, Fisher said the Fed should announce "sooner rather than later" limits on the amount of assets it would purchase, preferably in December.
Fisher said inflation need not be the inevitable consequence of quantitative easing, but the Fed must remain mindful.
He said that while he backed the first round of the Fed's purchases of mortgage-backed securities, he doubted it should be continued as it had not reduced interest rate differentials as he had hoped.
He also said that he was not in favor of extending Operation Twist, under which the Fed has been selling short-term securities to buy $45 billion in longer-term debt every month to push down long-term borrowing costs.
OVER TO FISCAL POLICY
Fisher chimed into the debate on setting specific numerical rates for unemployment and inflation as markers for when the Fed would consider lifting interest rates.
"One option I believe we might pursue is to have a definition of our unemployment target as well as our long-term inflation target," he said, noting it would be difficult however and setting an overall limit on asset purchases was preferable.
Fed Chairman Ben Bernanke said last week that adopting numerical thresholds for unemployment and inflation could be a "very promising" step to develop the Fed's communication strategy, but stressed that it was still under discussion.
"I am not worried about inflation right now, I am worried about an underemployed workforce in America," said Fisher.
"American businesses are ready to roll ... they are just not doing so, and that requires the fiscal authorities to incentivize them properly, in whatever way they choose."
He also said that after dealing with its fiscal policy, the U.S. government should seek a free trade deal with Europe.
"It is very important our government, in addition to getting its act together on fiscal policy, resist with every fiber in their body the temptation to follow a protectionist course."
(Reporting by Sarah Marsh and Reinhard Becker, editing by Gareth Jones/Ruth Pitchford)