Washington, Sep 10 2009 (IFR) - Federal Reserve Vice Chairman Donald Kohn today in a panel discussion at the Brookings Institution in Washington downplayed the risk of the Federal Reserve depending on fiscal authorities to fund expenses accrued by a build up of new credit policies and payment of interest on reserves.

Kohn was addressing a concern raised by Ricardo Reis in a paper on the Fed's unconventional policy response in the current crisis. Kohn argued that the Fed's exposure to credit losses is minimal. And while he admits that the Fed's interest expense will increase when short-term rates rise, he maintained that the Fed will still manage to earn net income over the next two years. He offered two reasons for this conclusion. First, currency on which the Fed pays no interest, will remain a significant portion of its liabilities. And second, the Fed will have large earnings on its assets. "Short-term interest rates would have to rise very high very quickly for interest on reserves to outweigh the interest we are earning on our longer-term asset portfolio," he said. tessa.moran@thomsonreuters.com /wash

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