The president of the Federal Reserve Bank of New York, Timothy Geithner, said the pattern of large foreign central bank purchases of dollars that is holding down American interest rates will prove “transitory.”

“Very substantial official accumulation of dollar reserves” masks the impact that American budget and trade deficits would otherwise have on interest rates, he said. He urged policy makers to reduce the budget gap and endorsed the restoration of fiscal rules requiring new tax cuts or spending to be offset.

“These forces are almost certainly transitory, but their impact on capital flows, interest rates, and asset prices are likely quite important,” Mr. Geithner said in a speech in New York. “If they are large enough, they have the potential to alter or distort current decisions about investment and consumption in a way that could be detrimental” to long-term growth, he said.

Ten-year Treasury yields have averaged 4.38% since the start of 2002, a period when the budget slid into deficit, down from 5.48% in the previous four years of surpluses. Foreign official holdings of Treasuries more than doubled since 2002, to $1.32 trillion in October, Treasury data show.

Mr. Geithner, speaking at the Council on Foreign Relations, didn’t comment on the outlook for the American monetary policy.

Asked about potential adoption by the Fed of a public, numeric inflation goal, Mr. Geithner said any decision wouldn’t conflict with the central bank’s legal requirements to achieve stable prices and maximum employment. Barney Frank, the new chairman of the House Financial Services Committee, opposes any attempt to narrow the Fed’s mandate to inflation alone.

“There’s no conflict necessarily between the legislative mandate we have now in the United States for the governors of the central bank and the range of possible variants of the inflation targeting frameworks other countries have adopted,” Mr. Geithner said.

The need to reduce the budget gap is especially important because the American current-account deficit has reached an “unprecedented” level of 7% compared with gross domestic product, Mr. Geithner said.

The gap in the current account, the broadest measure of trade because it includes transfer payments and investment income, widened to a record $225.6 billion in the third quarter as the trade gap deepened and the country paid more interest to overseas investors.

Foreign central banks have accumulated holdings of dollars as they manage their currencies and record rising trade surpluses with the U.S. China, which limits movements in its currency to 0.3% a day, has reserves of about $1 trillion.

International investors hold about half of the $4.3 trillion of marketable Treasuries outstanding, according to monthly figures from the U.S. Treasury.

Large global imbalances “will have to come down over time,” said Mr. Geithner, who was director of policy development at the International Monetary Fund before joining the Fed. Reducing the budget deficit “is important to raising the probability that this process of adjustment unfolds with less risk.”

Emerging markets have reduced their vulnerability to financial and exchange-rate crises by improving monetary and fiscal policies, he said.