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 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 President Jeffrey Lacker said last week the Fed should consider foregoing the full extent of its long-term securities-buying pledge, which includes the plan to purchase $1.45 trillion of mortgage agency debt by the end of the year.
The Fed cut rates to zero in December and has pumped hundreds of billions into the financial system to fight 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 also 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 in the interview that he is confident the central bank can withdraw its massive economic stimulus measures without allowing dangerous 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 New York Fed head, who formerly ran the central bank's trading operation that buys and sells Treasury securities to meet the Fed's target interest rates, said the Fed has a range of options to prevent inflation even with the massive amount of money it has put into the financial system.
We have tools to manage our balance sheet so that we're not going to have an inflation outcome, bad inflation outcome, Dudley 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 earlier this month 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 extend an emergency lending program to mid-2010.
(Reporting by Mark Felsenthal; editing by Neil Stempleman)