CNBC's Steve Liesman had a 2-part interview (lovefest) this morning with New York Federal Reserve President William Dudley. Dudley came to the New York Fed from Goldman Sachs, and his appointment to Treasury Secretary Geithner's previous position was incestuous and controversial, as detailed recently in the WSJ. Even the reigning king of corporate cronyism, GE's Jeff Immelt (a NY Fed board member), was said to be unnerved by the appointment.
Warning: watching this clip will likely cause unrelenting indigestion.
Part 1 (4:27)
Part 2 (4:42)
Fears of inflation because of the Federal Reserve's massive quantitative easing measures are overblown, because the Fed has the ability to pull the liquidity out of the market fast enough to prevent price rises, William Dudley, New York Fed president, told CNBC Monday.
Since the onset of the financial crisis, the Fed has cut interest rates near zero and injected about $1 trillion in the markets to prevent credit from freezing up. Many analysts have warned the measures carry a high risk of inflation and on Monday a survey of economists in the National Association for Business Economics showed that 41 percent of them believed the measures to be inflationary.
"My view is that we have tools to manage our balance sheet so that we'll not have an inflation outcome," Dudley told CNBC. "We're far along in terms of having the interest on excess reserves and, just in case, developing other means of pulling out the excess reserves."
"Some of the exit strategies are already happening," Dudley said, explaining that lots of liquidity facilities were introduced with penalty interest rates and as the economy is recovering, firms return the liquidity to escape the punishment of high rates.
The Fed is also looking into the idea of banks depositing excess reserves with the Fed on a term basis, and into that of launching repo operations – selling securities to the market and withdrawing liquidity that way, Dudley said.
But he said it was too early to speak about launching the exit strategy, as the economy still isn't growing fast and unemployment is high.
"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.
"I'm totally committed to taking away the punch bowl at the right time," he said during the same interview.
It is possible that inflation could decline for a while because of the slack in economy and the banking system will take time to heal itself, Dudley added.
