Fed's Kohn: Don't Worry, We'll Pull Out in Time
There's just something terribly dirty about this entire thing, and in fact central banking as a whole is pretty filthy. Endogenous firm entry? Come on now.
WSJ's Real Time Economics:
Federal Reserve Vice Chairman Donald Kohn knows there’s plenty of slack, or unused capacity, in the economy. At a meeting of the Shadow Open Market Committee held today at the Cato Institute, Bank of America chief economist Mickey Levy wanted to know from Kohn: How do you measure it?
Kohn compared that to the challenge of defining inflation expectations, which he earlier called an “unobservable variable” even though Fed officials rely on them in determining whether the central bank needs to tighten policy. The same goes for the potential rate of gross domestic product growth in the economy. “You never can really observe what potential GDP is, you have to infer it from other things,” Kohn said, citing the trend of GDP growth, pressures on employment and wages and the unemployment rate.
The Fed does produce a measure of capacity utilization, which earlier this year hit its lowest level since records started in 1948. Add that to a near-10% unemployment rate, decelerating wage growth, rising productivity and the current inflation rate being very low, Kohn said, and we don’t have conditions anything like the 1970s when inflation took off.
“I think you can be pretty comfortable there’s a lot of slack,” he said.
Grrrrr, I love it when they talk about rising productivity. Sends my Fedbashing little heart racing.
When Kohn talks about central bank exit policies, I can't help but think about... oh nevermind. Jr Deputy Accountant is already R rated, no reason to push it any further than I already have.
In its most important aspects, the decision about when to begin exiting from the unusual policies is not materially different from any decision to start tightening monetary policy. We will need to begin to remove the extraordinary degree of accommodation in its various dimensions when we judge that exiting from the current stance of policy will be necessary to preserve price stability as the economy returns to higher levels of resource utilization.
Let me make this easy for the Fed - trying hard to bite my tongue and keep this from getting any more inappropriate than I have already made it - there's not an art to pulling out. When the funny money starts shivering and the Fed can feel it's about to bust its inflationary load, that's the time to move.
So stop with the rhetoric already, Kohn, you aren't fooling anyone.