New York Federal Reserve Bank President William Dudley said it is too early to talk about curtailing the central bank's long-term security purchases while the U.S. economic recovery is fragile.
As financial conditions improve, which seems to be the trajectory, it's a legitimate point to consider what you want to do in terms of your purchase programs, Dudley told CNBC in an interview broadcast on Monday.
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 because the economy still isn't growing very fast and we do have a very high unemployment rate.
Dudley's comments show a divergence of views on the Fed's interest-rate setting Federal Open Market Committee. Richmond Fed Bank President Jeffrey Lacker said last week the Fed should consider curtailing its purchases of $1.45 trillion of mortgage agency debt by the end of the year. Buying the full amount might provide more of an economic boost than would be necessary in a recovering economy, he said.
Dudley declined to be pinned down on whether he will oppose cutting the purchases short. But he said he would be reluctant to surprise markets, which expect the Fed to follow through with its buying pledge.
Market expectations are very, very important, and the market expects us to complete these programs, to do the full amount, Dudley told CNBC television. To contradict that market expectation, I think, is a pretty high hurdle.
The Fed cut rates to zero in December and has pumped hundreds of billions into the financial system to combat the worst recession in 70 years. With signs of recovery in housing and manufacturing, the Fed has said the downturn appears to be leveling out. However, it said any recovery is likely to be sluggish with unemployment, which was at 9.4 percent in July, painfully high for a while.
Dudley said he is confident the U.S. central bank can withdraw its massive economic stimulus measures without allowing inflation to take hold.
I'm completely committed to taking away the punch bowl at the right time, he said. I have no desire whatsoever to see inflation get out of control.
The Fed has a range of options to prevent inflation even with the massive amount of money it has put into the financial system, Dudley said.
We have tools to manage our balance sheet so that we're not going to have an inflation outcome, bad inflation outcome, he said.
The Fed's next policy-setting meeting is September 22-23. It has pledged to keep interest rates exceptionally low for an extended period to bolster the economy, but has already begun to taken some small steps toward exiting its aggressive stimulus measures.
The Fed said it would end its program of buying $300 billion of longer-term Treasury securities by the end of October. It also said it would shrink the size of short-term cash auctions in September.
At the same time, sensitive to pockets of economic weakness, the Fed moved to boost credit to the ailing market for commercial real estate by extending an emergency lending program to mid-2010.
(Editing by Neil Stempleman)