The U.S. Federal Reserve will not have to raise rates prematurely to head off inflation because of the central bank's ability to pay interest on reserves, New York Fed president William Dudley said on Wednesday.

Dudley, answering questions from the audience after a speech, said being able pay interest on reserves meant excess reserves will not inevitably trigger inflation.

Asked about whether the Fed would extend its consumer and small business loan program, the Term Asset-Backed Securities Loan Facility (TALF), Dudley noted that under a section of the Federal Reserve Act, the program is approved only when conditions are unusual and exigent.

Certain sectors of the economy are still very strained, and the commercial real estate sector, for one, is likely to be under stress for a considerable period, he said.

The Federal Reserve will have to evaluate if that means that conditions are unusual and exigent and for how long that is likely to last, he said. We will definitely be taking up this subject in the near future.

Asked about whether the Fed would sell the longer-term securities it had bought during the crisis, Dudley said that while the Fed has traditionally been a buy-and-hold investor, if it decided to sell these securities it would be an important event for the market.

We would have to be careful to prepare the market for that eventuality, Dudley said.

Asked about the Fed's support for the securitization market, Dudley said there was a limit to what the Fed could legally do.