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On the Record

June a Good Bet for Rate Hike

Janet Yellen and her colleagues at the U.S. Federal Reserve seem to be eyeing June for a long-anticipated rise in the federal funds rate, assuming inflation heads on track to its target, reckons former Vice Chairman Donald Kohn.

Kohn served as vice chairman under Ben Bernanke from 2006 to 2010, capping a 40-year career at the Fed. He is a senior fellow at the Brookings Institution, a U.S. think tank.

Edited excerpts from his recent interview with The Nikkei follow.

Q: What was your impression of Fed Chair Janet Yellen’s Dec. 17 press conference? The Federal Open Market Committee added a new phrase, “be patient,” to its forward guidance while maintaining that the federal funds rate will likely stay near zero for a “considerable time.”

I thought the interesting aspect of the statement in her press conference was about inflation. I think some people in the markets thought that the Fed would have to see inflation close to 2% before it raised rates, but she made it clear that 1) they were going to look through the decline in energy prices, the effects on headline inflation; and 2) even for core inflation, it could be where it is, but they would have to be more confident that it was rising towards their 2% target.

In some sense, I think it showed the Fed more willing to act in a somewhat more pre-emptive way than I think some in the market thought. But, at the same time, they’re not going to act precipitously. They are going to be patient.

That’s maybe a little more flexible than “considerable time,” which people had interpreted maybe as three or four meetings, six months or so. So I think they do have some more flexibility, but it’s not complete flexibility.

Q: When do you think the Fed will begin raising rates?

I think it’s clear from the dot chart and from a lot of the discussion that, although [Yellen] was very careful to say that every meeting is a [possibility,] that it’s more likely to be at a press conference meeting, and June makes more sense. So my guess is they’re thinking about June.

Q: Chair Yellen said the Fed probably won’t repeat the “measured pace” of rate increases seen in the past.

I think she was trying to get away from the measured-pace language that came to mean 25 [basis points] at every meeting. Now, I don’t think that’s what we intended, and I was part of the FOMC at the time, when we put those phrases in there, in May, I guess, of 2004, but it certainly came to mean that. The current FOMC is trying to avoid that degree of predictability.

She was trying to caution us that we shouldn’t expect the same language. They’re not going to commit to doing 25 at every meeting. In fact, the trajectory [of their expectations] looks flatter than that, so at least for a year or for 2015, if they start in June, it’s probably about every other meeting they would raise [the rate]. I do think that she was pushing back against the idea that they would be so predictable in their rate increases, and that was reinforced by her emphasis on data dependency.

Q: How do you view the state of the U.S. labor market and economy?

I think the 5% [economic growth] we now know for the third quarter explains a little better why the labor markets seem to be strengthening so much.

I think most of [the fourth-quarter projections] I’ve seen other folks making are more like 2 1/2 [percent]. So that gives us something like 2 1/2 for the year. That’s strong but it’s not overwhelming.


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