Don Kohn, the Fed vice-chairman who retired at the end of August, is now available to give talks, according to the website of the Washington Speakers Bureau. Nobody knows the Fed better and his insight will no doubt be in high demand. He will be speaking at a dinner for Deutsche Bank clients next Wednesday and at an event for RBS the week after that.
Unlike former Fed chairman Alan Greenspan – who attracted some criticism for giving talks before the minutes of his last FOMC meeting were even published (including from the FT) – Mr Kohn is waiting until after the FOMC’s next meeting on September 21st. There will probably still be a few grumbles, but Mr Kohn has gone beyond what the rules require of him, and after his decades of service to the Fed it is inconceivable that he would say or do anything that compromised the monetary policy process.
An interesting research paper from the Federal Reserve staff has drawn my attention to a speech Fed deputy chair Don Kohn made last October about why the Fed has not promised to keep rates low enough for long enough to allow a bit of inflation in the future (such as by setting a price level target).
To be sure, we have not followed the theoretical prescription of promising to keep rates low enough for long enough to create a period of above-normal inflation. The arguments in favor of such a policy hinge on a clear understanding on the part of the public that the central bank will tolerate increased inflation only temporarily–say, for a few years once the economy has recovered–before returning to the original inflation target in the long term. In standard theoretical model environments, long-run inflation expectations are perfectly anchored. In reality, however, the anchoring of inflation expectations has been a hard-won achievement of monetary policy over the past few decades, and we should not take this stability for granted. Models are by their nature only a stylized representation of reality, and a policy of achieving “temporarily” higher inflation over the medium term would run the risk of altering inflation expectations beyond the horizon that is desirable. Were that to happen, the costs of bringing expectations back to their current anchored state might be quite high.
Can bubbles be predicted?
Donald Kohn, the outgoing Fed vice chairman, told an ECB meeting today, “Judging when an asset is getting away from its fundamental value is almost impossible.” (via Reuters).
It’s a step away from William Dudley, New York Fed president, calling for the Fed to take a more proactive approach in addressing asset bubbles. But if, as Mr Kohn says, you can’t identify them, you certainly can’t act against them. (Mr Kohn also warned, according to Reuters, that trying to do so would lead to “more volatility in output and inflation,” though it’s hard to imagine more volatility in output than we saw at the end of the last bubble.)
So how hard are housing price bubbles to identify? Looking at US housing prices over the past few decades, it’s not immediately obvious why a bubble would be difficult to identify. Housing prices may stray from rental prices, but in the long run, they return to the rental levels. (And why wouldn’t they? If houses were actually becoming more valuable in a given city, both housing and rental prices would rise).
Here’s nationwide home prices (Case Shiller 10-city) compared to rents since 1987:
Prices didn’t move far from the rental levels before returning until the recent run up. And then they skyrocketed. And then (un)predictably, they collapsed. Perhaps there’s no city that has a more perfect model of stable housing prices until the recent bubble than Miami. Was it that surprising that prices fell after that run up in housing prices (without a simultaneous increase in rents?) Read more
Another dove flies away. Donald Kohn, the Vice Chairman of the federal reserve board, has announced that he will step down come June, leaving the board shy three members.
Mr Kohn is one of the last remaining dove governors. Another dove, Frederic S. Mishkin, resigned in August 2008. The other governor whose seat is still empty is Randall S. Kroszner, who stepped down in January 2009. (Mr Kroszner, who made few comments directly on monetary policy, was no dove: his most remembered statement on rates at the beginning of the financial crisis was unmistakably hawkish).
Left on the board Read more
Rate setting meetings are going to get lonely. Donald Kohn has announced he will leave the Federal Reserve, effective June 23.
History will judge Chairman Bernanke and the Fed to have met challenges over the last several years “with great speed, imagination and effectiveness,” Kohn said in his resignation letter to President Barack Obama, released today by the Fed. Read more
It’s been a bad day for Fannie Mae and Freddie Mac. First, Hank Paulson, former Treasury secretary, says that Russia tried to spur China to sell the GSE’s securities to spark a crisis.
Then, Donald Kohn, Vice Chairman of the Federal Reserve, warns that community banks are particularly vulnerable to interest rate risk because of their holdings of Fannie Mae, Freddie Mac and Ginnie Mae mortgage securitites. Read more
A confession: I missed the Fed’s regulatory guidance to banks on interest rate risk yesterday. Some have misread this as a hint that rate increases are coming soon. I think that is the wrong take.
Bernanke and Kohn have talked about using regulatory tools rather than interest rates in the first instance to combat future bubbles and avoid the build-up of financial excesses. The latest guidance looks to me to be a very modest example of this -not a signal on rates. Read more