Inflation Worries 'Unhinged,' Kohn Says
Saturday, June 17, 2006
Federal Reserve Board member Donald L. Kohn said yesterday that central bank officials will look for new ways to convince Americans that inflation will not take off.
Consumers' and investors' expectations of future inflation have risen slightly in recent months by several measures, raising concerns at the Fed that such perceptions might become self-fulfilling if they embolden businesses to raise prices, encourage shoppers to pay them and prompt workers to demand higher wages.
Consumers' expectations of future inflation eased a bit in early June from the end of May but remained slightly higher than in April, according to a University of Michigan survey released yesterday.
"Inflation expectations have come a little bit unhinged," Kohn said at an economic conference in Chatham, Mass., according to Bloomberg News. "It's not a big deal, but it has presented us with some issues."
Kohn alluded to Fed Chairman Ben S. Bernanke's promise to Congress that he would seek the support of his central bank colleagues to adopt a numerical long-term inflation goal, or target, as a way to keep inflation low and stable. For example, the Fed could publicly commit itself to keeping inflation close to 2 percent over two years, or 1 to 2 percent over some period. Currently, the Fed seeks "price stability," or low inflation, but doesn't define it with a number.
Kohn, a 36-year veteran of the central bank, has shared former chairman Alan Greenspan's concern that a strict inflation targeting system might limit the Fed's flexibility.
"I think the conversation on the [Fed], the one that our chairman had promised in his confirmation hearings, is that we will begin to talk about whether there are some ways to better anchor expectations without putting ourselves in a straitjacket," Kohn, President Bush's nominee to become Fed vice chairman, said at the conference.
Bernanke asked Kohn last month to head an internal Fed committee to examine a variety of central bank communication issues, possibly including inflation targeting.
Treasury Secretary Lawrence H. Summers, attending the same economic conference, expressed even stronger doubts about any proposal that could tie the Fed's hands.
"This is no time for slavish adherence to mechanistic rules of any kind," Summers said, according to Bloomberg News. "To straitjacket monetary policy would be quite unwise."
Bernanke had no comment on Kohn's or Summers's remarks. But at his November confirmation hearing, he said establishing a long-run inflation goal would be "fully consistent" with Greenspan's approach, "including its appropriate emphasis on the role of judgment and flexibility in policymaking."