NEW YORK CITY-Add William Dudley, president and CEO of the Federal Reserve Bank of New York, to the roster of Fed executives providing reassurance on interest rates. “The outlook implies that short-term interest rates are likely to remain unusually low for an extended period,” Dudley said here Monday in prepared remarks at New York University’s Stern School of Business.

However, the head of the New York Fed held out the possibility that an increase would occur sometime in the foreseeable future. “A failure to raise short-term interest rates at the appropriate moment based on our dual mandate objectives”—namely, maximum sustainable employment and price stability—“would also be a losing strategy with respect to net income,” Dudley said. “Inflation would climb, bond yields would rise and the Fed would ultimately be forced to raise short-term rates more aggressively, or to sell more assets at lower prices to regain control of inflation.”

The Fed at present is “very far away” from achieving that dual mandate, Dudley said. Although the economic picture has brightened compared to six months ago, with annualized GDP reaching 2.8% in the most recent quarter, “The coast is not completely clear. The healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness.”

Specifically, Dudley noted that housing activity remains “unusually weak,” with home prices beginning to soften again in many parts of the country. He added that state and local government finances remain stressed, “and this is likely to lead to further fiscal consolidation and job losses in this sector that will offset at least a part of the federal fiscal stimulus.”

Further, Dudley said, “We cannot rule out the possibility of further shocks from abroad, whether in the form of stress in sovereign debt markets or geopolitical events. Higher oil prices act as a tax on disposable income, and the situation in the Middle East remains uncertain and dynamic.” Additionally, Dudley said that “we cannot ignore the risks stemming from the longer-term fiscal challenges that we face in the United States.”

Yet he added that “the most immediate domestic problems may recede rather than become more prevalent” in the near term. On the housing side, Dudley said, stronger employment growth should lead to increased household formation, thus providing more support to housing demand.

Dudley suggested that “anxieties about the large overhang of unsold homes” that have gone into foreclsoure “may overstate the magnitude of the excess supply of housing.” Families that have lost their homes through foreclosures “are likely to seek new homes as their income permits,” he said, although he noted that “many may re-enter the housing market as renters rather than buyers.”

On the state and local side, Dudley expressed confidence that a rising economy would boost sales and income tax revenue, while helping to narrow near-term fiscal shortfalls. “Moreover, although we do need to remain ever-watchful for signs that low interest rates could foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability, risk premia on US financial assets do not appear unduly compressed at this juncture,” he said.