The Federal Reserve is often portrayed as the chaperone who takes away the punch bowl just as the party is getting fun.
But this time is different, said William Dudley, the president of the New York Fed. The U.S. central bank isn’t seeking to end the party, maybe just tone it down.
“I don’t think we’re removing the punch bowl yet. We’re just adding a bit more fruit juice,” Dudley said in a speech at the University of South Florida Sarasota-Manatee.
The New York Fed president noted even after the Fed increased interest rates this month, the federal funds rate is in a “still unusually low” range of 0.75%-1%,
“In such circumstances, it seems appropriate to scale back monetary policy accommodation gradually,” Dudley said.
The message of gradual and patient rate increase echoes remarks made earlier Thursday by Dallas Fed President Rob Kaplan in an interview with MarketWatch.
Read: Fed’s Kaplan sees risk Washington could derail the expansion
The Fed wants to reduce the risk of the economy overheating, he said, and avoid inflation overshooting the central bank’s 2% target.
Dudley noted that financial conditions were generally easing prior to the Fed’s March meeting, even though the Fed had moved in December and warned the market to expect more tightening in 2017.
Equity prices rose by about 4% and credit spreads, such as those for high-yield bonds, narrowed, he said.
The party may slow down when the market begins to anticipate the Fed is going to shrink its balance sheet, Dudley said.
Long-term rates are likely to rise and financial conditions will tighten somewhat, he said, just as the earlier purchases pushed down long-term rates.
The Fed amassed a $4.5 trillion balance sheet the wake of the financial crisis.
“Presumably, financial conditions would tighten by more if we were to end reinvestments earlier and more abruptly. This suggests a better course may be to taper reinvestments gradually and predictably,” he said.