Oct. 6 (Bloomberg) -- Federal Reserve Bank of New York President William Dudley said that the risk of slowing inflation is “problematic” for the economy and that interest rates should stay low for a while to ensure a “robust recovery.”

“Our near-term focus should be to keep significant monetary accommodation in place for an extended period” to achieve the Fed’s congressional mandates for maximum employment and stable prices, Dudley said in a speech yesterday in New York. The U.S. jobless rate is “much too high,” and the economy has “significant excess slack,” he said.

Dudley’s comment about “meaningful downside risks to inflation” signal a greater concern about a slowing rise in prices than the Sept. 23 statement from Fed policy makers, who said “inflation will remain subdued for some time.” Central bankers left the nation’s benchmark rate in a range of zero to 0.25 percent while indicating that rates will probably remain low for an “extended period.”

“The desired policy outcome is a robust recovery in the context of price stability,” Dudley, 56, who serves as vice chairman of the Fed’s rate-setting Open Market Committee, said at Fordham Law School. He dismissed concerns by some investors that the Fed’s expanded balance sheet will stoke inflation, saying such views are “not well founded.”

Fed Tools

The Fed’s assets are likely to peak at “around $2.5 trillion” in early 2010, up from about $2.15 trillion now, Dudley said. The Fed has the tools and the will to raise rates when necessary, and “could always drain reserves the old- fashioned way, by selling assets,” including its Treasuries and mortgage-backed securities, he said.

Consumer prices have fallen for six straight months from year-earlier levels, the longest stretch of declines since a 12- month drop from September 1954 to August 1955, according to the Labor Department.

The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.

“We would not need much of a decline in inflation to run the risk of an outright deflation,” Dudley said. “Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.”

The unemployment rate rose to 9.8 percent last month, the highest since 1983, from 9.7 percent in August.

‘Bleaker Picture’

“Growth will likely not be strong enough” to reduce the jobless rate “quickly,” and other labor indicators “paint a bleaker picture,” said Dudley, a former Goldman Sachs Group Inc. economist who took over as New York Fed chief in January.

Dudley said he sees three forces slowing the economic recovery: The declines in home and stock prices, creating a “shock to household net worth”; the “temporary” nature of the federal government’s fiscal stimulus; and the fact that banks have not “fully recovered” from the credit crisis.

Also, the commercial real estate market is likely to see “more pain” and will also help restrain growth, Dudley said.

Dudley, in response to an audience question, reiterated the Fed’s opposition to identifying banks that used lending programs.

Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued the Fed last year on behalf of its Bloomberg News unit, demanding details about borrowers and the collateral they put up.

Manhattan Chief U.S. District Judge Loretta Preska ruled Aug. 24 that the Fed had to disclose information. The central bank appealed that ruling last week.

“The Fed has done a tremendous amount in the last two years,” and “we feel that we need to be accountable” to the public and Congress, Dudley said. At the same time, “the disclosure of individual borrowers’ names very well may be a bridge too far” and would “undermine the value of the facilities that we’re providing,” he said.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Michael McKee in New York at mmckee@bloomberg.net.

Last Updated: October 6, 2009 00:01 EDT