It is "premature" to end the Federal Reserve's quantitative easing at this time, although "some of the exit strategies are already happening," New York Federal Reserve president William Dudley said yesterday.
"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 in an interview on CNBC.
Dudley also said inflation was not an immediate threat due to economic slack.
He indicated the Fed's balance sheet will likely reach the $2.5 trillion figure. "It's probably more likely than not," he said, which would imply the Fed would execute the full amount of authorized securities purchases.
"The liquidity facilities have come down so dramatically that there is not that much more room for them to shrink. Yet we still have a long ways, potentially, to go in terms of our agency mortgage-backed security purchases," Dudley said. "The purchases should start to overwhelm the effects of the liquidity facilities coming down."
Dudley said among the several factors that must be taken into account to decide about the exit strategy — such as the state of the economy — market expectations are "very important."
On the impact of the securities purchases, he said while the agency MBS purchases have had a "great effect," the same cannot be said of the purchases of Treasuries, where the Fed has put less emphasis.
The benefit of Treasury purchases is indeed "more ambiguous," Dudley said.
For one thing, the size of the Treasury purchase program is "pretty small" when compared to the overall Treasury market and the federal deficit this year. He stressed that the goal is to ease financial conditions and not monetize the government's debt.
On supervision issues, Dudley said the Fed could have done better, although he declined to comment on whether the Fed was too close to the private banks.