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Former Fed Vice Chair Kohn backs rate cut, rejects Dudley suggestion to foil Trump

Key Points
  • Former Fed Vice Chair Donald Kohn told CNBC that the central bank should cut interest rates next week.
  • However, he said former New York Fed President William Dudley's suggestion to hold rates steady to thwart President Donald Trump's re-election chances was "wrong and harmful."
Donald Kohn, former vice chairman of the U.S. Federal Reserve
Joshua Roberts | Bloomberg | Getty Images

The Federal Reserve should cut interest rates next week and not listen to a suggestion that it consider keeping rates level to harm President Donald Trump's re-election chances, former central bank Vice Chairman Donald Kohn said Tuesday.

In a CNBC interview, Kohn indicated he believes the Fed will follow market expectations and lower its benchmark overnight lending rate by 25 basis points at its Sept. 17-18 meeting.

"I think they have ample reason to do that. The economy is fine, it's growing around 2%, has been growing around 2% for the last year. The unemployment rate is low," he said on "Closing Bell." "But there are downside risks there from the trade war and the global slowdown, and inflation is running a bit below their target."

However, he said he's not sure how far the policymaking Federal Open Market Committee should go beyond that.

Market expectations are for another cut in either October or December, followed by an additional easing in early 2020. The FOMC already has cut once this year, a 25 basis point reduction that was the first since 2008 after having raised the funds rate nine times since December 2015. The funds rate is currently targeted between 2% and 2.25%.

"So I think buying a bit more insurance is the right thing to do at this meeting. What I'm not so sure about is where they will be going after that," he said.

"I'm much less certain than the market seems to be that we need a whole bunch of decreases here," he said.

He did express certainty against a suggestion from former New York Fed President Bill Dudley, who argued in a Bloomberg Opinion piece that the FOMC should push back against Trump's intense criticism of the Fed by not lowering rates. Doing so, Dudley wrote, might hamper Trump's re-election which he called "a threat to the U.S. and global economy."

"I thought it was wrong and harmful," Kohn said of Dudley's commentary. "The Fed needs to keep away from politics. They need to apply the best economic analysis possible to achieve legislative mandates."

He said writing the piece was "a very dangerous thing to do."

CNBC has reached out to Dudley for comment.