On Tuesday, former Federal Reserve Vice Chairman Donald Kohn voiced concerns 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, said Kohn, who served in the Fed at the interval of 40 years including four as Vice Chairs.
He told a webinar sponsored by the American Enterprise Institute that a new monetary framework adopted by policy makers last year heightened the chance of faster price gains.
This is a framework that's not designed to deal with the downside risk of inflation, said Kohn, who is now a senior fellow at the Brookings Institution. '' This is the worrisome piece that is.
The danger is that the central bank will end up having to raise interest rates more 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 impure to lower the interest rates in an effort to prevent unemployment from falling to levels that it would have considered too low in the past.
Kohn said he don't think the Fed should change its policy just yet. But he wants officials to reflect the inflationary dangers they face and openly admit that in their first set of quarterly economic projections.
'' Fed needs to be more open and honest than I think was in the last round of projections about what it is actually expected to do, he said. That would be a constructive step itself.
The Federal Open Market Committee will release updated economic forecasts in the United States at its next week policy meeting. In March, a preponderance of policymakers did not see the Fed raising interest rates from their current level near zero until 2023.
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