Fed's Kohn: Tightening Of Monetary Policy Must Begin
Oct, 01 2009
(CNN) - Federal Reserve Vice Chairman Donald Kohn said Wednesday that a
decision to tighten accommodative monetary policies would depend on economic
forecasts, rather than current conditions.
Speaking at the Cato Institute's Shadow Open Market Committee Meeting in
Washington, D.C., Kohn said that the central bank must begin to withdraw its
accommodation "well before aggregate spending threatens to press against
potential supply, and well before inflation as well as inflation expectations
rise above levels consistent with price stability."
He did say, however, that he could not provide a list of variables that would
lead the Fed to begin an exit, instead saying that they would use all sources
of information to determine when the exit would be warranted.
"Clearly, the present degree of accommodation--as gauged by nominal and real
short-term interest rates and the size of our balance sheet--is extraordinary,
and we will have to take account of how that is influencing spending and
inflation expectations when deciding when and how fast to tighten." Kohn said
in prepared remarks.
Kohn went on to say, as many Fed officials have in recent months, that the
central bank has the tools to wind down current monetary policy when it is
necessary, and he said that the Fed is developing new techniques to drain its
reserves, including reverse repurchase agreements against mortgage-backed
securities and time deposits for banks at the Fed.
