RTTNews - In an interview with CNBC Monday, New York Federal Reserve Bank President William Dudley said that talk of the Fed cutting back on purchasing mortgage bonds as economic conditions improve is premature.

My own personal view is, I think it's a little premature to be so confident that you want to pull all these things back right now, Dudley said.

Market expectations are very, very important, and the market expects us to complete these programs, to do the full amount.

He added that contradicting market expectations is a pretty high hurdle.

Dudley was responding to comments made by Richmond Fed President Jeffrey Lacker and St. Louis Fed President James Bullard who, at two separate events last week, said that the Fed may not need to completely purchase all $1.25 trillion in mortgage-backed securities authorized by year-end.

My view is we have tools to manage our balance sheet so we're not going to have an inflation outcome, a bad inflation outcome, Dudley added.

With the Fed's ability to pay interest on excess reserves, the banks just take the excess reserves to the Fed, get paid interest. They don't lend them out. So you don't get that cycle of the excess reserves leading to a credit boom and an overheated economy.

Further, according to Dudley, the excess reserves are funding the purchase of Treasuries, and agency debt and agency mortgage-backed securities.

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