The next step in the Federal Reserve's monetary policy is more likely to be a rate hike rather than a pause, "former Vice Chairman of the Federal Reserve Donald Kohn told reporters during the" 2026 Bund Annual Meeting - Technology, Geopolitics, and Global Economy "forum on October 19.

Cohen worked at the Federal Reserve for about 40 years, serving as Vice Chairman from June 2006 to June 2010, and currently working as an economic researcher at the Brookings Institution.

He believes that the reason why the Federal Reserve needs to consider continuing to tighten monetary policy is because the Fed is facing a situation where inflation continues to exceed its 2% target. Among them, some inflationary pressures come from the supply side, especially global tariff policies and the impact of conflicts in the Middle East on energy prices such as oil; In addition, the demand side is also facing pressure from price increases, especially the demand growth generated by the hot investment in the AI (artificial intelligence) industry.

In the long run, AI is expected to significantly improve supply side productivity, but this dividend has not yet emerged. At the same time, various infrastructure constructions aimed at supporting the development of the AI industry, as well as massive investments in specific capital equipment, engineering construction, data centers, and other projects, are generating enormous demand. ”Cohen said. In the current environment where the US economy is approaching full employment, AI has further driven up demand for goods and services, forcing the Federal Reserve to consider implementing a tight monetary policy.

Cohen said that in the face of this situation, the Federal Reserve may still need to do some work to reduce the inflation rate, as inflation will not subside on its own. When inflation remains at such a high level for such a long time, its self sustainability risk is high.

Cohen told reporters that if the Federal Reserve wants to pause interest rate hikes, it needs to first be certain of three things - supply pressure is easing, underlying inflation is decreasing, and demand pressure will not overwhelm prices.

In Cohen's view, the pace of future interest rate hikes by the Federal Reserve is unlikely to be very fast, as inflation expectations are well anchored and wage performance is consistent with the 2% inflation target.

We have not seen any spillover of inflation into the wage sector, nor have we seen any spillover of inflation towards long-term expectations, "Cohen said.

After taking office as the chairman of the Federal Reserve, Kevin Warsh decisively abandoned forward guidance on monetary policy, making financial markets feel that the Fed's monetary policy has become unpredictable.

Cohen said that when the benchmark interest rate is far from zero, specific forward guidance on interest rates is indeed "not so necessary and not so useful".

Cohen admitted that the central bank does not need to be very specific, such as' if this happens, we will do it this way '. But the central bank needs to clarify around the economy - how the economy changes, how various forces evolve, and how various forces interact with monetary policy?

Cohen believes that the central bank needs to clarify these things for two purposes: firstly, as a reference for testing new data - "if you have this economic narrative, when new economic data that contradicts it comes out, there is nothing to refute"; The second is related to the independence of the central bank's monetary policy.

The independence of the central bank's monetary policy is also reflected in the fact that the central bank needs to tell the financial market what it is thinking and why it thinks so, so that financial institutions can analyze and evaluate the future volatility trends of the financial market based on the way the central bank handles problems, "Cohen said.

Cohen stated that Walsh has realized that once the Federal Reserve expresses its expectations for economic output and inflation, financial markets will speculate on its policy intentions. Therefore, he withdrew from communicating with financial markets at the recent Jackson Hole Conference. Fortunately, Walsh has recently corrected this practice to a considerable extent.

In June of this year, Federal Reserve Chairman Walsh announced the establishment of five special working groups on communication, balance sheet, data, productivity and employment, and inflation framework to comprehensively reform key areas of the Federal Reserve's monetary policy making process, which has also received high attention from global financial markets.

Cohen sees Walsh's move as a paradigm shift, but ultimately, what the five task forces need to do is whether they can make the Federal Reserve better, better at capturing economic changes through data, better at analyzing inflation and financial markets, and better at communication.

Cohen told reporters that the establishment of five working groups by the Federal Reserve is a good idea, and introducing external perspectives can bring additional strength to the Fed, but it cannot be considered a major shift in the Fed's monetary policy. Because the goals of former Federal Reserve chairmen such as Ben Bernanke, Janet Yellen, Jerome Powell, and current chairman Walsh are consistent - to pursue price stability and maximize employment.

(Author Chen Zhi)