Fed’s Kohn, Dudley Defend Size, Scope of Emergency Loan Plans

Two of the Federal Reserve’s top policy makers defended the Fed’s emergency lending, saying the programs won’t cause an inflationary surge or create “significant” risk for taxpayers.

Vice Chairman Donald Kohn, speaking yesterday in Nashville, Tennessee, said the Fed has loaned to “sound” borrowers and plans to disclose more about such credit. New York Fed Bank President William Dudley, speaking at the same conference, said he’s “not worried at all that” a doubling in the central bank’s balance sheet to $2.19 trillion will spur inflation.

Policy makers are pursing an unprecedented strategy to revive the economy by providing credit to companies other than banks and cutting the main interest rate to as low as zero. The Fed plans to buy as much as $1.25 trillion in agency mortgage- backed securities this year and is providing financing for securities backed by loans to consumers and small businesses.

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The increased credit has provoked concerns prices will surge. Central bank officials are “dramatically underplaying the risks and liability side of the balance sheet,” former St. Louis Fed President William Poole said in an interview at the conference.

“We are very vulnerable to an inflation explosion,” said Poole, a senior economic adviser to Merk Investments LLC in Palo Alto, California.

Former Fed Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following the expansion in its assets.