Federal Reserve Board Gov. Daniel Tarullo reiterated Thursday that the Fed needs to move carefully as it unwinds its liquidity facilities to ensure it does not disrupt still-fragile markets.
"As with all monetary policy decisions, we should ultimately tailor the particulars of our response to the circumstances as we find them," he said in a speech at the Federal Reserve Bank of New York's community bankers conference. "If anything, the unprecedented nature of this exercise means that we should be unusually attuned to economic and financial conditions during, as well as before, our exit, and we should be prepared to make prudent adjustments as necessary."
Tarullo expressed caution about an exit strategy that included the early sale of assets before a sustainable recovery is well established.
He stressed that it would not be advisable for the Fed to decide upon a "single game plan that will be announced in advance and rigidly implemented after a decision is made to raise rates."
Instead, an optimal strategy would depend on money market and lending conditions then.
As previously outlined by Fed Chairman Ben Bernanke, the central bank is planning to use interest on reserves held by banks to help drain the $1.1 billion now held by institutions at the Federal Reserve banks.
It is also planning to use reverse purchase agreements, term deposits and, if necessary, sales of assets on the Fed's balance sheet.
The central bank has been expanding its range of counterparties for reverse repurchase operations beyond the primary dealers typically relied on by the Federal Reserve Bank of New York. The Fed has also already stopped buying Treasury securities and exited the market as the largest buyer of mortgage-backed securities at the end of last month.