Kohn-heads

Last night CNBC reported that “sources” were putting Larry Summers Fed Chair announcement soon. I have been a Don Kohn (former Vice-Chair, now Senior Fellow at Brookings) advocate and a couple days ago he gave his thoughts on policy.

On the zirp: “Reduces the room for responding to
further downward shocks, unexpected changes in market rate
expectations, or errors in judgment reflected in too-early
exit.”.. “the associated long period of
extraordinarily low interest rates may have induced financial
investment decisions that will result in losses and possibly
even threats to financial stability as interest rates are
raised.” what? there might be losses? UNPOSSIBLE

On Exit: “sales of longer-
duration securities on the books of central banks are not
necessary to tighten monetary policy.”

“The exit from unconventional policies might be especially
disruptive given rates being as low as they will have been for
as long as they will have been,”…
“Nonetheless, individual central banks cannot be expected
to steer away from the domestic objectives embodied in treaty,
law, or remit – say by deliberately running inflation above or
below the price stability objective – to help other
jurisdictions reach their own domestic objective.”

The last comment echoes our thoughts from last week that the age of co-operative Central banking is taking a time out. Domestic concerns will outweigh international-are you hearing this Indonesia, India and Brazil? Finally, he re-enforced the concept of transparency (a view we do not share) and added that if the CB were to screw it up (before short rates left the zirp) policy options would be extremely limited. Translation: we need the zirp to buttress the expansion and need to get away from it so we can lower rates in the next cycle downturn. Have fun Larry.

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