In fact, Dudley conceded that a balance sheet runoff would be the equivalent of rate hikes, and said that when the process begins the Federal Open Market Committee may well "take a pause in terms of raising."
However, he said he was not worried that the balance sheet runoff would be disruptive. Dudley figures the Fed will merely let the bonds mature, rather than actively seeking to sell them back into the market.
"If we do something on the balance sheet, it's going to be something that's very passive. It's just going to be running in the background," he said.
The Fed amassed much of its securities through three rounds of quantitative easing — a monthly bond-buying program that involved primarily Treasurys and mortgage-backed securities. The Fed currently holds nearly $2.5 trillion in Treasurys and another $1.8 trillion in MBS, along with a smattering of other holdings.
On the issue of interest rates, Dudley said two more hikes this year "seems reasonable." The Fed increased its benchmark short-term rate a quarter point on March 1. Traders currently anticipate that additional moves are likely in June and December.