Sun, Apr 24, 2005 - Page 11 News List

Fed `not yet finished' with interest rates, Kohn says


The US Federal Reserve is "not yet finished" bringing up interest rates to a normal level after seven straight increases of a quarter percentage point, central bank governor Donald Kohn said on Friday.

In a speech to a New York economics conference, he said the federal funds rate, now at 2.75 percent, is likely to keep rising at a "measured" pace, the term used by the Fed to signal a quarter-point.

Kohn said the Fed remains on its path of "removing the unusual degree of policy accommodation," or extremely low rates to ward off deflation and stimulate growth.

"We have not yet finished this task: The federal funds rate appears to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run, and, if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace," he said.

Kohn said the bank is focused on keeping inflation in check while maximizing growth, and not on other factors such as the housing market or the current account deficit.

"These imbalances certainly affect the forces of supply and demand and have consequences for price stability. Nevertheless, their direct influence on monetary policy is limited," he said.

"We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly," Kohn said.

At the same time, the Fed would not hesitate to raise rates even if the higher rates mean higher debt-servicing burdens for the current account, the government, or households.

"In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur," he said. "It is through such actions that we aim to achieve our objective of economic stability."

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