MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn 

The Federal Reserve’s next move on interest rates is likely to be higher as long inflation pressures linger and given new Fed Chair Kevin Warsh’s strong focus on the price stability side of the central bank’s mandate, former Fed vice chair Donald Kohn told MNI. 

“To carry through on the emphasis and priority given to price stability, is the next move more likely to be up or down? I would say it's more likely to be up,” said Kohn, a four-decade veteran of the Fed who is now at the Brookings Institution.

While Warsh was circumspect in offering policy guidance or even detailed insights into his economic views, Kohn said there was a hint of it when the chair spoke about the degree of policy restrictiveness, describing it as uneven. 

That, Kohn noted, was a break from Jerome Powell’s R-star focused approach, which would lead the former chair to say policy was mildly restrictive.

Warsh also repeatedly emphasized his commitment to returning inflation to 2% after more than five years of overshoot, painting it as the FOMC’s primary immediate goal. His hawkishness took many investors by surprise.   

“I share some of the skepticism on whether they are headed back to 2%. And I was a bit skeptical on whether they needed, particularly, that last cut in December, the insurance cut,” he said. 

“Growth is solid, the labor market looks solid. If wealth continues to build and there isn’t some evidence of the surge in productivity, the argument might be they bought a little too much insurance last year and they have to take it back.” (See MNI INTERVIEW: Fed At Neutral Risks Entrenched 3% Inflation-Koenig)

Kohn said he expected a hawkish shift in the tone and substance of the Fed’s internal deliberations but was surprised by how quickly the transition to active discussion of rate hikes had taken place. 

“The direction of travel was where I expected things to go but the travel was further than I thought it would go,” he said. 

TASK FORCES

The former vice chair welcomed Warsh’s launch of various task forces to examine possible improvements in everything from communications to the balance sheet. He said there is precedent for this around the world. 

“I think that's a great idea. It gives time, six months at least, for him to get his feet on the ground and figure out what needs to happen, what's already happening, etcetera. I like the idea of bringing in some outside voices into those task forces. It's a little tricky with confidential information and whatnot, but that can be handled,” said Kohn.

“There are other central banks – the Bank of England, the Riksbank, Reserve Bank of New Zealand, the Reserve Bank of Australia – that have brought in outsiders to evaluate them. And in this case he's talking about task forces that are joint insiders and outsiders, so I think that's a very constructive way to proceed.”

ECONOMIC NARRATIVE

Warsh’s reluctance to offer economic clues led to a dearth of information about his inclinations that will need to be addressed more directly as his tenure evolves, said Kohn 

“He kind of used the dialing back for guidance to avoid saying very much about how he was viewing, or the committee was viewing, the economy. Why was the inflation forecast revised so much? Why were the dots revised so much higher? We didn’t get that. How is inflation going to come down over time. We didn’t get that either. 

“But he's only been there three weeks, so I think it was a good start. Even if he doesn't give forward guidance on interest rates, he needs to give a story, a narrative around what's happening in the economy, why it's happening, what the committee led under his leadership will be looking at.”