–‘Fully Confident’ Eventual Draining to Control S-T Rates

By Claudia Hirsch

NEW YORK (MNI) – Though now is not the time to withdraw the
liquidity that the Federal Reserve has pumped into the financial system,
it has the right tools to do so, according to New York Federal Reserve
Bank Executive Vice President Brian Sack Wednesday.

“I think no one has suggested the appropriate timing is imminent,”
Sack said, answering an audience question on the exit’s timing following
a luncheon speech to the New York Association of Business Economics.

“The FOMC is going to decide the timing of the exit and it will do
so based on how financial and economic conditions evolve. … For now,
the FOMC has said it’ll keep interest rates low for an extended period.”

Sack said that while the policy-setting Federal Open Market
Committee is discussing this schedule, he and his staff are ensuring the
monetary authority will have the means to drain liquidity when and as it
sees fit. Sack oversees the vast markets group at the New York Fed as
well as the FOMC’s open market operations.

“I am fully confident that we will control short-term interest
rates, and we will use draining tools as needed to make sure that
happens,” he said.

Sack said concerns about inflation should be “two-sided” and take
into account the possibility of deflation. He pointed to the FOMC’s
forecast that the economy will have what he described as a “considerable
amount of slack for some time” and that inflation will hover below the
informal target range.

He also said he has “full confidence” in his European counterparts’
understanding of financial markets and the European Central Bank’s
“capacity to make the correct policy decisions” regarding its fiscal
crisis.

Of the recently reintroduced one-for-one dollar swap arrangements
with five foreign central banks, including the ECB, Sack said, “I think
we should all view these programs as having no counterparty risk,”

This, he concluded, is because the Fed is extending credit to the
central banks themselves, not the financial institutions that will get
the dollar funding.

** Market News International New York Bureau: 212-669-6430 **

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