Bank president of the New York Federal Reserve, William Dudley, said that the Federal Reserve has the tools it needs to prevent inflation from accelerating and doesn’t need to begin shrinking its balance sheet.
The central bank has doubled the size of the assets that it has during the last year to more than $2 trillion through emergency lending programs in hopes of stimulating the economy and unclogging the credit markets.
In a recent interview on CNBC, Dudley stated, “Obviously, as financial conditions improve, as the economy does somewhat better, which seems to be the trajectory they’re on, it’s a legitimate point to consider what you want to do in terms of your purchase programs,” Dudley continued, “It’s a little bit 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 has stated that it’s too early to make a decision about curtailing the aid and is hoping that the Federal Reserve’s credit programs will wind down as private lending improves. In his CNBC interview, Dudley said, “My view is we have tools to manage our balance sheet so we’re not going to have an inflation outcome, a bad inflation outcome. With the Fed’s ability to pay interest on excess reserves, the banks just take the excess reserves to the Fed, get paid interest. They don’t lend them out. So you don’t get that cycle of the excess reserves leading to a credit boom and an overheated economy.”
There are currently no signs that the Federal Reserve’s actions has lead to inflation. Consumer prices remained steady in the month of July and are still down 2.1% from one year ago—one of the longest deflationary periods since 1950.
