MW: Fed's Kohn: Stable inflation expectations are key
By Greg Robb
WASHINGTON (MarketWatch) -- The Federal Reserve does not want to take policy steps that might upset the public's view that inflation is likely to remain stable, said Federal Reserve Board vice chairman Donald Kohn on Friday. To ward off the risk of deflation from the recession, academic research teaches that a central bank should promise to keep rates low enough to create a brief period of above-normal inflation. But the Fed has not gone this far. It has only promised to keep rates low for an extraordinary period. In a speech at the central bank, Kohn said the central bank had rejected the academic research as unsuitable for the real world where inflation fears could spin out of control. "We should not take this stability for granted," Kohn said. "The costs of bringing expectations back to their current anchored state might be quite high," Kohn said, in a veiled reference to aggressive interest rate hikes.
