Vice Chairman of the Fed Kohn in a speech titled ‘Central Bank Exit Policies,’ is laying out the ‘conditions for exit,’ ‘the tools for exit,’ and the ‘communication about exit.’ In contrast to comments from Warsh and Plosser about having to raise rates as quickly as they cut, Kohn is saying “I can’t predict how rapidly we will have to raise short term interest rates…that depends on how the economy seems to be recovering and the outlook for inflation.” He laid out the different options they have to reverse their easy policies and said they “will need to explain especially carefully…the evolution of our assessment of the economic situation.” He summed up by saying that due to a large output gap, subdued inflation and continued credit constraints, “exceptionally low rates are likely warranted for an extended period” and removal of policy accommodation “will be challenging.”
Bottom line, the vagueness in the comments are apparent in terms of WHEN as the Fed truly has no idea and is in ‘play it by ear’ mode which means reliance on their forecasts and judgment. Threading the needle is the easy cliché to describe what the Fed will need to do and I wish Vegas had odds to measure expectations of the possible outcomes. I’m a seller of any scenario that turns out to be smooth.
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