Sep. 30, 2009 – 12:20 p.m. CT

Fed Goes on Defense of Its Independence and Credibility

Last week, vice chairman of the Fed, Don Kohn, echoed comments made by his colleague on the Board of Governors, Kevin Warsh, that the Fed will move aggressively and preemptively to remove the accommodations that it has provided to stabilize the economy – a zero fed funds target and a multi-trillion dollar balance sheet. Kohn underscored that the Fed would tighten policy prior to an overheating of consumer spending and of the broader economy, although the Fed all but admitted that it has absolutely no idea when such overheating might occur. The best Kohn could do was to say that the Fed will give us as much warning as possible when it decides to make a move. (Gee, thanks!)

Bottom Line: After averting another Great Depression, the Fed is struggling with how to handle policy in the "Great Recession," which would be difficult in the best of times. Add to that, threats that Congress may clip the Fed's wings so that it can't exit as it should – whenever that may be – and it is imperative that the Fed assert its independence today. Message heard, but it doesn't mean much for the course of policy today or even over the next six months.

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