NY Fed’s Dudley Calls Exit Plan Talks ‘Very Premature’

Discussion among market players and even Federal Reserve officials on when the Fed may begin to exit asset-purchasing programs are “very premature,” according to the Federal Reserve Bank of New York president and CEO William Dudley. In a speech Saturday before the Association for a Better New York, Dudley said agency debt- and mortgage-backed-securities-purchase programs as well as the Treasury-purchase program contributed overall to the Fed’s expanded balance sheet. But the swelling balance sheet does not pose inevitable threats of inflation and do not necessitate talks of immediately winding-down the Fed’s agency MBS-purchase program. Dudley said in the case of lackluster recovery, unemployment and capacity remain too high to foster inflation, regardless of the Fed’s balance sheet. “[C]oncern about ‘when’ the Fed will exit from its current accommodative monetary policy stance is, in my view, very premature,” he said. He did, however, acknowledge the importance of looking at just how the Fed can exit its numerous monetary policies. The size of purchase programs looks likely to push the Fed’s balance sheet to roughly $2.5trn, above the peak reached last December, Dudley said. His comments that talks regarding when the Fed may exit are premature came days after two prominent Fed officials spoke about possible exits. In a speech late last week, St. Louis Federal Reserve president James Bullard indicated the Fed would in 2010 begin the shift into implementing an exit strategy by eliminating the liquidity programs as they expire, exiting the current interest rate policy and ceasing the asset-purchase program. He said recent housing data indicates the market is near bottom. “While exiting liquidity programs seems quite clear, exiting the asset purchase program may have to rely on selling assets as appropriate,” he said. The same day Bullard gave his speech, the Richmond Federal Reserve president Jeffrey Lacker said purchasing agency MBS to the extent of the $1.25trn allowed under the program may provide more stimulus than needed or even helpful. “With the economy leveling out and beginning to grow again later this year, and with bank reserve demand ebbing as financial conditions improve, I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide,” Lacker said. Write to Diana Golobay.