New York Federal Reserve Bank President William Dudley Thursday stressed that the Fed would be ready to tighten monetary policy when it is clear the economy is again on track.

"We will absolutely take away the punchbowl when the time is right," he said while taking questions following a speech at Pace University of New York.

He reminded that in addition to the Fed's dual mandate regarding maximum employment and price stability, the central bank also has a goal of financial stability.

"I think we learned in spades, very uncomfortably, that without financial stability, we can't achieve our other objectives," Dudley said.

With financial stability "very very important" to the Fed, "we are always looking at the economy and financial markets to make sure that we are not sowing the seeds of some bubble or excess" that could create future instability for the market, he said.

Asked several questions about the U.S. fiscal cliff, Dudley said he was "not going to offer any advice about what the fiscal package would look like," but made clear there are "huge consequences for the economic outlook."

In terms of fiscal stability risk, "it's a political question, not an economic question," he said.

Finding a "credible fiscal program" is key for a wide array of issues, including U.S. capital markets.

"As long as you have a credible fiscal program, people are usually happy to invest in your debt," Dudley said.

On the looming U.S. debt issue, he warned not to be too put off by the "scary numbers" being put forward and reminded that these projections are "based on current trajectories of current programs."

"These programs can be altered and have been altered in the past," Dudley said, referring to former Federal Reserve President Alan Greenspan's work on the Social Security issue in the late nineties.

Agreement in adjustments regarding Social Security and healthcare is "something that's eminently achievable," he said.

Dudley also noted that the U.S. situation was "not as dire" as other developed economies due to better demographics and a more open immigration policy.

When asked about pending regulations in 2013, he acknowledged that small businesses have told the Fed that they are holding back on hiring and investment because of this uncertainty.

"Hopefully, we will have a lot more clarity in the next few weeks," Dudley said.

Asked about the effect of Dodd-Frank legislation on the U.S. economy, he said "the consequences" of these new rules "have been very muted in terms of holding back recovery."

Some banks are "unhappy with the fact" that there are more capital and liquidity requirements, as well as increased scrutiny of their business structure, but Dodd-Frank is "absolutely necessary" in preventing another "Too Big To Fail" incident, he said.

"That's our goal; that has to be our goal," Dudley said.

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