Donald Kohn, Fed Vice-Chairman, today in Nashville, Tennessee said that the Fed will not allow its "unorthodox" policies to trigger a surge in inflation. Really, that is very powerful statement by the Vice-Chairman. He also said that the Fed must remain flexible:
"That flexibility could entail doing more to ease credit if the economy proves resistant to the monetary and fiscal stimulus now in train,"
How exactly is the Fed going to prevent a surge in inflation?
"The key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion," Kohn said.
Easily said then done. The magnitude of the positions/purchases that the Fed has made indicates that it will not be that easy to reverse. Am I being to pessimistic?
Our current problem is not one liquidity. It is matter of insolvency and nothing has been done to address that. The Fed and Treasury can do all they want with our money to ease credit but it won't do any good. Treasury reported last week that banks are not lending and that is after trillions of dollars pumped into the financial conglomerates. Am I missing something? I am not an economist but I did stay at a well-known motel chain once.