Markets should listen to central banks -Fed’s Kohn

JACKSON HOLE, Wyo (Reuters) – Federal Reserve Governor
Donald Kohn said on Saturday financial markets should pay
attention to U.S. central bank attempts to signal its policy
attentions since this will make prices more accurate.

Still, he told a symposium organized by the Kansas City
Fed, market participants should realize that policy-makers have
imperfect knowledge of economic conditions.

“To the extent that the central bank can convey something
useful about its intentions, markets that take account of these
intentions will be priced more accurately,” Kohn said.

“The risk is that private agents overestimate the ability
or willingness of central banks to damp volatility in asset
prices or the economy, or that they fail to appreciate that
future policy actions depend on an imperfectly predictable
economic outlook,” he added.

Kohn suggested that a look at recent history should make
investors aware of the risks they face.

“Investors have had an opportunity to observe that policy
actions in 1987, 1998 and 2001-2003 cushioned the economy, but
they did not stop major declines in the prices of equity in
1987 and 2001, or of risky credits in 1998,” Kohn said.

He said there was a possibility that people perceive the
economy as more stable than it is or believe central banks have
more power than they really do to smooth the economy’s path.

He said reminders to the public about the uncertainties in
the economy “are appropriate and should have some effect.”

Kohn said there was some question of whether the Fed, in
its eight-times-a-year policy pronouncements that follow its
rate-setting meetings, should be more explicit when it warns
the public.

“The question is whether these warnings should be
supplemented by actions to inject uncertainty into policy
pronouncements by saying less than we can or into the economy
by shifting our objectives away from seeking the best outcome
for the economy over the intermediate term,” Kohn said, making
clear that he did not feel this was a good practice.

“In my view, such policies would result in less-accurate
asset pricing, reduced public welfare on balance, and
definitely be at odds with the tradition of policy excellence
of the person whose era we are examining at this conference,”
he added.

The annual Rocky Mountain gathering was this year focused
on a retrospective of Alan Greenspan’s 18 years at the helm of
the Fed. Kohn was a long-time senior Fed staffer before being
elevated to Fed governor and has been close to Greenspan
throughout his lengthy tenure.

Greenspan is due to step down at the end of January.