Falling mortgage rates fueled by the Fed are having only a limited impact on the economy, said Federal Reserve Bank of New York President William Dudley Monday.
While the Fed's stimulus policy is working, even more aggressive policy could have been more effective, Dudley said.
Last month, the central bank launched a third round of bond-buying stimulus known as quantitative easing, or QE3. The program entails buying $40 billion in mortgage-backed securities each month, in an effort to lower mortgage rates and stimulate the housing market.
Since then, mortgage rates have fallen to record lows.
Home prices, sales and new construction had already been showing signs of improving before the Fed acted, and are largely expected to continue recovering.
But Dudley said the impact of Fed policy on the housing market could have been even greater if it weren't for tight lending standards and higher fees from Fannie Mae and Freddie Mac, which have discouraged banks from originating loans.
"One reason that monetary policy may have been less powerful than normal is that one of the primary channels through which monetary policy influences the real economy -- housing finance -- has been partially impaired," Dudley said at the National Association for Business Economics Annual Meeting in New York.
Monetary policy also becomes less powerful over time, he said, so a larger stimulus from the start would have been more effective than spreading it out.
"With the benefit of hindsight, monetary policy needed to be still more aggressive," he said.
Considered an inflation dove, Dudley has thrown his support behind QE3 and continued to argue in favor of the policy in his speech Monday.
He said he remains confident that the Fed will be able to keep inflation in check, despite unprecedented efforts to pump liquidity into the financial system. If inflation were to suddenly start rising rapidly, he said the Fed could tame it by raising the interest rate it pays banks on excess reserves.
Dudley also used the speech to reiterate a key point often expressed by Federal Reserve Chairman Ben Bernanke. "Monetary policy is not a panacea," he said, urging Congress and the White House to do their part to stimulate the economy, both by addressing the long-term debt of the country and enacting policies to stimulate the economy now.
"Fiscal policy is now a drag rather than a support to growth in the U.S., and this will likely continue," Dudley said.
He spoke in favor of immigration policies that attract foreign workers with scarce skills, education and job retraining programs, infrastructure spending and a simpler tax code.