Former Fed VC Kohn suggests that Fed may actively need to inject further stimulus if its forecasts do not show much higher levels of employment and higher inflation, closer to 2%

Julian Callow

In a telephone interview conducted with the New York Times, Don Kohn, the recently retired former Fed vice chairman, said that, in his view, "to not trigger" some additional stimulus measures by the FOMC would require that "there was the prospect of progress in the forecast toward achieving both much higher levels of employment and, eventually, higher inflation, closer to my 2% target". He also argued that it was imperative that inflation expectations remained well anchored: "If those expectations begin to drift down, we could get into a situation where real interest rates start to rise".

Mr Kohn commented that, were the Fed to resume purchases of Treasuries, it would not need to specify a limit: "To have a substantial effect, people would have to anticipate substantial purchases", but the Fed would "not necessarily" need to announce that it was purchasing, for example, $1trn". "Rather, the Fed could state, 'We're buying a smaller amount now, but we'll continue to watch the situation and if it warrants, we'll buy more' . . . then, that sort of thing would give the public and the markets a sense that someone was out there, ready to buy if the economic situation weakened further or didn't improve".

He also said that the previous recession had been different to prior ones since it hadn't begun "with the Fed slamming on the brakes". Rather, "it began when the economy collapsed under the weight of the housing bubble - and then you had the panic over losses that resulted from the bubble's collapse".

Mr Kohn concluded, "it's going to be a slower recovery. But acceptance of that reality is not a reason for the central bank not to do everything it can help that recovery along".

Note that in the most recent "hawkometer" published by our US economics team, Mr Kohn was judged to be slightly to the dovish side of Fed Chairman Bernanke, and therefore somewhat on the dovish side overall on the FOMC. That said, Mr Kohn, with his 40 years' experience at the Fed (and a board member of the FRB since 2002, including is regarded by markets as having had a particularly influential role in the formation of US monetary policy.

source: BarCap