Federal Reserve Bank of New York President William Dudley said that markets will likely push up long-term interest rates as the central bank moves closer to ending its balance sheet reinvestment policy.
After lifting their benchmark interest rate at their March policy meeting, Federal Reserve policymakers have increasingly turned their attention to their nearly $4.5 trillion balance sheet and said they have discussed when they may begin winding down its size.
"The anticipation of and actual announcement by the FOMC of changes in reinvestment policy is likely to push up longer-term interest rates and tighten financial conditions somewhat ... to what extent is difficult to judge," Dudley said during a March 30 speech in Florida on financial conditions and monetary policy.
Dudley suggested he supports tapering reinvestment gradually and predictably, in part because "presumably, financial conditions would tighten by more if we were to end reinvestments earlier and more abruptly."
The New York Fed chief, who has a policy vote on the FOMC, also said that changes in the reinvestment policy may also feed back in to interest rate decisions as financial conditions tighten. "I would expect that, when we begin to end reinvestment, we will have to consider the implications for the appropriate short-term interest rate trajectory," Dudley said.