Federal Reserve Bank of New York President William Dudley suggested the central bank should be cautious in raising interest rates, given limits on its ability to respond to a recession with borrowing costs close to zero.

Noting concerns from some economists that the risk of a recession is increasing, Dudley told a central-banking seminar hosted at his bank that the Fed may have limited room to cut rates in the event of a downturn in the next few years. That may raise the need to turn again to unconventional policies, such as purchasing bonds.

“A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation,” he said in the text of remarks Monday, posted on the New York Fed’s website. The event was closed to the media.

Dudley cited studies showing the Fed’s first asset purchase program that started in 2008 had helped to reduce long-term interest rates and stimulate the economy, while later efforts had less, albeit significant, impact.

At its Sept. 20-21 meeting, the policy-setting Federal Open Market Committee voted to leave interest rates unchanged for the sixth straight time, opting to wait for more evidence that gains in employment will continue and bring inflation closer to the Fed’s 2 percent target. Policy makers noted, though, that the case for a move had strengthened and most of them expected an increase this year from the current target range of 0.25 percent to 0.5 percent.

Easy Money

“Monetary policy remains accommodative,” Dudley said.

Calling the expansion “tepid,” he said that lackluster performance reflected the constraints on the Fed’s ability to stimulate growth once it had reduced rates effectively to zero in December 2008.

Dudley also played down worries that post-crisis regulation had reduced the level of liquidity in securities markets.

“New York Fed staff have been conducting an extensive analysis of empirical measures of market liquidity and the effects certain regulations may have had on it,” he said. “The work to date finds little evidence -- based on traditional liquidity measures -- of any meaningful degradation in market liquidity across key asset classes. ”

He said that if further study revealed a link between regulation and lower liquidity, the costs would have to be measured against the benefits from making markets safer and more robust.