Kohn: Probably Some Time Until Fed Hikes Funds Rate

Federal Reserve vice chairman Donald Kohn said Saturday that returning at some point to a “more normal” monetary policy stance will be “critical” to preserving price stability, but he said “it probably will be some time” before the Fed raises the federal funds rate, given the outlook for a delayed and gradual recovery.

Kohn defended the Fed’s nonconventional monetary easing measures against charges that they are “mixing monetary and fiscal policy” and that they are jeopardizing the Fed’s independence, and he contended they have been effective. For instance, he said, the Fed’s purchases of longer-term securities have succeeded in holding down longer-term interest rates.

He said he expects the yield curve to remain steep, enabling the Fed to make relatively high returns on assets bought at low cost. In time, he said, the Fed should be able to shrink its balance sheet, partly by using its authority to pay interest on reserves.

By increasing the rate of interest paid on excess reserves, he said, the Fed should be able to hike the federal funds rate while reducing its asset holdings “slowly.”

Kohn, in remarks prepared for a Princeton University conference, also maintained that, in the current weak economic environment, fiscal stimulus is more effective than it would ordinarily be.

— Market News International

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