In his first major public appearance since becoming the Federal Reserve Bank of New York's president and chief executive, William Dudley threw his support Friday behind a dramatic idea: letting the central bank issue its own debt.

On its face, the idea, which would require congressional approval, would give the Fed a chance to revive lending without simply dumping trillions of dollars into the economy. But Dudley suggested a separate benefit — keeping the Fed independent from the White House.

Selling "Fed bills has more of an optical advantage, because it has more of a separation from the Treasury," he said in an appearance before the Council on Foreign Relations in New York. "The Fed could conduct its policy, issue its bills and not rely on the Treasury."

Dudley also said policymakers have not ruled out creating a "bad bank" for toxic assets, offered reassurance about the size and quality of the Fed's balance sheet, and added his voice to the chorus seeking a systemic risk regulator.

But the possibility of Fed debt sales could set in motion the most immediate changes at the central bank. As it expands its rescue of the financial markets, significant challenges are emerging. Last week it launched a program that would lend up to $1 trillion to jump-start consumer sectors, and it has already spent billions on bailouts for American International Group Inc. and the commercial paper and money market sectors.

Though the Fed has said inflation is not a concern in the current environment, that could change if it fails to sop up the excess money that might remain in the market as a result of the liquidity programs.

"One could imagine a future point in time … where we might want to tighten monetary policy," Dudley said. "We don't think there's a huge problem, but it's always nice to have a belt and suspenders, and the suspenders would be another mechanism to drain excess reserves through the system."

Instead of selling its own debt, the Fed could take more money from the Treasury Department. Dudley did not specifically reject this idea and a "supplemental financing account" established in September to lend to the Fed held nearly $200 billion as of March 4.

But that might not make enough of a difference, since the Treasury is nearing the congressionally mandated debt ceiling. Congress could always raise the ceiling, but that would only further tie the central bank to the White House.

Sensitivity to the Fed's independence is running high after criticism that the Obama administration essentially co-opted the Term Asset-Backed Securities Loan Facility. The prospect of making the Fed a systemic risk regulator has only deepened those anxieties. "We should not ask the Fed to take on responsibilities that would undercut its ability to achieve its monetary policy objectives," Charles Plosser, the president and CEO of the Federal Reserve Bank of Philadelphia, said in a speech Friday.

Most Fed and Treasury officials have not said publicly whether selling central bank debt would be better than borrowing from the administration. The Fed and the Treasury worked last week to develop legislative language that could accomplish either option.

Also Friday, Dudley said that even though policymakers are focusing more on creating a Public-Private Investment Fund, there is still life for the concept of a "bad bank" that would relieve institutions of the worst assets plaguing their balance sheets.

"At the moment, the PPIF and 'good bank/bad bank' concept are kissing cousins, with the PPIF leading the race," he said. "But I don't think we'd rule out 'good bank/bad bank' formulations at individual institutions."

Echoing Fed Chairman Ben Bernanke, Dudley sought to ease concerns that the central bank's balance sheet is growing out of control. The Fed reported $1.9 trillion of assets on March 4, and Dudley noted that the sheet has actually shrunk slightly in recent weeks. He argued that the sheet will slim down further once the economy recovers, since the Fed will end many of its liquidity programs, and short-term assets will fall off the sheet naturally.

"When market functioning improves, our facilities will become less attractive, and usage of our facilities will become less attractive," Dudley said.

He also dismissed concerns that Congress might seek to intervene if the Fed's balance sheet became too bulky. "The goals of Congress and the goals of the Fed here are very much aligned," he said. "The Federal Reserve can only lend on a secured basis. As long as we do that and do it in a way that's consistent with our goals, I don't see why Congress would have any quarrel with our actions."

Dudley listed seven ideas Congress and policymakers should consider, including creating a centralized system for over-the-counter derivatives transactions, an accounting overhaul and tools to resolve banks and nonbanks that fail. He also said a systemic risk regulator should be endowed with "both the responsibility and the powers to look across the entire financial system."

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