Kohn says Fed policy must be "nimble"

By Tamawa Kadoya

DALLAS (Reuters) - Federal Reserve Vice Chairman Donald Kohn said on Friday that U.S. central bank officials must be nimble in conducting policy, especially amid recent market turbulence.

"We need to be alert that the (policy) reaction needs to be changed as financial markets evolve," Kohn told a Dallas Fed policy conference.

His comments come after the Fed cut the benchmark federal funds rate by a larger-than-expected half percentage point in September to prevent an economic downturn stemming from market turmoil amid a sudden tightening of credit conditions.

Markets expect the central bank to continue cutting rates this year, but chances of a rate cut at the Fed's next policy-setting meeting on October 30-31 have dimmed as recent data has shown the economic fallout from market turbulence may be limited and as credit markets regain some normalcy.

Rather than adhere to strict policy rules, the Fed's vice chairman reiterated a line from a speech on the economic outlook on October 5 that the central bank would have to be "nimble" in conducting policy to promote growth and keep inflation tamed.

Asked by a conference participant whether he had changed his mind about inflation targeting, Kohn said his views had evolved somewhat and that inflation expectations were "a little better anchored" in inflation targeting.

But "that doesn't mean I've gone over to that side entirely," said Kohn, who is known to have been opposed to an explicit inflation target. He said the central bank needed to be careful about sacrificing "nimbleness and flexibility" in policy decision-making.

Inflation targeting, which Fed Chairman Ben Bernanke has long endorsed, is one topic the Fed is discussing as part of its talks to improve communications. Kohn is the chair of the Fed's subcommittee on communications.