142 – Donald Kohn on Fed Policy from the 1970s to Today

**David Beckworth** (0:02)
Welcome to Macro Musings, the podcast series where each week we pull back the curtain and take a closer look at the important macroeconomic issues of the past, present and future. I'm your host, David Beckworth of the Mercatus Center. We are glad you've decided to join us.
Our guest today is Donald Kohn. Don is a senior fellow at the Brookings Institution and currently serves as an external member of the Financial Policy Committee at the Bank of England.
Don is also a 40-year veteran at the Federal Reserve System, including serving as a governor and then vice chair of the Board of Governors from 2002 to 2010 Don joins us today to discuss his career as well as some of his recent work. Don, welcome to the show.

**Donald Kohn** (0:47)
Thank you, David, for having me on. I'm looking forward to this.

**David Beckworth** (0:50)
Well, it's a real treat to have you on. You're quite the all-star. You've worked your way through the Federal Reserve System. You started at the Kansas City Federal Reserve Bank and then to the Board of Governors. And I want to start there with your career at the Board of Governors.
You came in there in 1975, which means you were there when Arthur Burns was chairman of the Fed. So please tell us any insights into that period.

**Donald Kohn** (1:16)
So I did come in from the, I was at the Kansas City Fed from 1970 through the middle of 1975
I had several of my colleagues at the Kansas City Fed had migrated to the Board of Governors, people that I was close to in Kansas City and people that I respected a lot and liked interacting with. And they kept saying, it's really cool back here in Washington. There are so many people at the Board that know a lot. There's nothing you can think of that someone hasn't already thought about. And this is a really great place to work right at the center of policy making.
So they convinced me that this was a good place to come. And they were right. So it was great fun. Of course, 1975 and the latter part of the 70s were an exciting, interesting time for the US economy. The great inflation at the Federal Reserve and the Fed was wrestling with how to get control of this thing, what to do, what it had to do.
Arthur Burns was a very demanding person to work for. Now, I was a lowly staffer. But in that position, I briefed the board on recent financial developments every couple of weeks. There was a weekly briefing for the Board of Governors. Someone would brief on nonfinancial developments. People would brief on the money supply and credit growth. And people would brief on financial markets. And I had the financial market piece. He was very exacting. And he knew the data very well. And he held your feet to the fire. And he could be very dismissive if he didn't believe what you were telling him. And you couldn't support what you were doing. It was a very scary experience. There was one person whose name I fortunately forget. That I was told that before this person came down to brief Arthur Burns and the board, he had to take a little courage from his desk, a little liquid courage to do this.
And it wasn't a good time for the Federal Reserve. And I think Burns himself gave a talk called The Agony of Central Banking.
And he didn't feel the Fed had, there were forces outside the Federal Reserve that were contributing to this inflation. He didn't want to take the very hard steps necessary to deal with those forces. He wasn't, my impression, maybe from my briefing of him was that he didn't tolerate alternative views. Well, he was dealt a bad hand. I mean, there were oil price shocks.
A lot of union wages were indexed and tied to the CPI, so there was certain momentum to this thing. But I also think he didn't, the cards he was dealt, he didn't play very well. And it took Paul Volcker to come in and demonstrate that when a central bank wants to achieve price stability, a central bank can achieve price stability.

**David Beckworth** (4:29)
Let me ask about Athanasios Orfanidis' research on this period. So he has some really maybe provocative but nonetheless interesting work on this period. And he argues that contrary to John Taylor's work and others, he claims that if you look at real-time data from this period, the Federal Reserve actually was following a Taylor Rule fairly closely. The only problem was the potential real GDP or output gap data was really bad in real time.