Kohn, long shot for U.S. Fed chairman, warns of early tightening
Aug 23 (Reuters) - The Federal Reserve faces more severe risks if it tightens policies too early than if it waits too long, a potential long-shot candidate to run the U.S. central bank wrote in a paper published this month.
Former Fed Vice Chairman Donald Kohn said the decision to exit easy-money policies will be more difficult this time around, arguing that a move to raise interest rates should hinge on "the risk of overheating and of a sustained rise in inflation above target."
The paper, published by the Brookings Institution think tank, where Kohn is a senior fellow, gives a timely peek at how he might steer the Fed as Ben Bernanke's tenure as chairman draws to an end in January.
U.S. President Barack Obama is expected to nominate a successor this fall, with current Vice Chairman Janet Yellen and former Treasury Secretary Lawrence Summers seen as the clear front-runners. Still, lawmakers who met privately with Obama last month said he was also considering Kohn, 70, who retired from the Fed in 2010.
In the paper, Kohn addressed the Fed's key challenges as it unwinds years of unconventional policies adopted in the wake of the severe recession.
"(T)he cost of exiting too early, of raising rates and then seeing the economy slow more than desired, would seem to exceed the costs of being too late, allowing inflation to rise more than anticipated," he wrote.
The U.S. central bank has kept rates near zero since late 2008, and more than tripled its balance sheet to some $3.6 trillion, to spur investment, hiring and economic growth.
Kohn's policy advice was similar to Bernanke's. The former vice chairman has backed the Fed's plan to keep rates where they are at least until unemployment falls to 6.5 percent from 7.4 percent, as long as inflation remains contained.
Addressing the risk of financial asset bubbles, which some fear will result from all the monetary easing, Kohn said raising rates too early to fight such excesses "could have especially adverse consequences on achieving inflation and output objectives."
Instead he suggested that effective regulation could do the job.
As for the Fed's $85 billion in monthly asset purchases, Kohn said they "are likely to be stopped or tapered off when economic expansion is strong enough to put underutilized resources back to work over time, but well before the economy threatens to overheat."
Obama has only mentioned Yellen and Summers by name in talking to the media about his decision for Fed chairman. Recent surveys of economists tend to put Kohn as the third- or fourth-most likely choice.
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