Former Fed Vice Chair Donald Kohn Worries Inflation Risks Are Rising

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Former Federal Reserve Vice Chairman Donald Kohn voiced concern on Tuesday that the U.S. central bank is not well-positioned to deal with a rising threat of faster inflation.

“There are risks to the upside for inflation,” Kohn, who served 40 years at the Fed including four as vice chair, said.

Former Fed Vice Chair Donald Kohn Worries Inflation Risks Are Rising

He told a webinar sponsored by the American Enterprise Institute that a new monetary framework that policy makers adopted last year heightened the chances of faster price gains.

This is “a framework that’s not designed to deal with the upside risks to inflation,” Kohn, who’s now a senior fellow at the Brookings Institution, said. “That’s the worrisome piece.”

Former Fed Vice Chair Donald Kohn Worries Inflation Risks Are Rising

The danger is that the central bank will end up having to raise interest rates further and faster to keep inflation in check, he added.

Under its new modus operandi, the Fed is deliberately aiming to push inflation above its 2% target after years of falling short of that goal. It’s also forsworn lifting interest rates solely to prevent unemployment from falling to levels that it would have considered too low in the past.

Kohn said he doesn’t think the Fed should change policy just yet. But he wants officials to openly acknowledge the inflationary dangers they face and reflect that in their next set of quarterly economic projections.

“The Fed needs to be more open and honest than I think it was in the last round of projections about what it is actually expecting to do,” he said. “That in itself will be a constructive step.”

The Federal Open Market Committee will release updated economic forecasts following its policy making meeting next week. In March, a preponderance of policy makers didn’t see the Fed raising interest rates from their current level near zero until after 2023.

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