Fed will have to be 'timely' to prevent inflation, Volcker says

Former Federal Reserve Chairman Paul Volcker was confident that the Federal Reserve will be able to pull out of its controversial decision to buy $600 billion of Treasury bonds to boost private lending before causing inflation.

“The Federal Reserve will have to act in a timely way to head off inflationary consequences,” he said Friday at an event hosted by the American Enterprise Institute. “I think they understand the problem.”

Volcker's comments come after current Fed Chairman Ben Bernanke told CBS's "60 Minutes" that he was 100 percent confident the Fed would be able to rein in any inflation caused by the second "quantitative easing" effort.

However, Bernanke and the Fed have had to fend off pointed criticism from Republicans and some Democrats about the decision. Instead of lowering long-term interest rates, the move will cause inflation and devalue the dollar, critics argue.

The decision has driven some GOP lawmakers to introduce and back legislation that would refine the Fed's mandate. While currently the Fed is instructed to pursue policies that maximize employment and control inflation, Republicans like Rep. Mike Pence (Ind.) and incoming House Budget Committee Chairman Paul Ryan (Wis.) support legislation that would instruct the Fed to focus solely on inflation.

Although the Fed's decision to buy bonds is causing a "big hullaballoo" now, Volcker noted that the practice was "absolutely routine" in the 1950s.

"It's not brand new for the Federal Reserve to be operating in the bond market," he said.

Volcker is currently head of the president's Economic Recovery Advisory Board.