Fed Still Has Lots of Arrows: Former Gov. Kroszner

The Federal Reserve has not run out of options to boost the economy and must focus on managing people's expectations to avoid a prolonged slump like Japan experienced, former Federal Reserve Governor Randall Kroszner told CNBC Tuesday.

United States Federal Reserve
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United States Federal Reserve

"The Fed still has a lot of arrows in its quiver," Kroszner said.

Looking at the last Federal Open Market Committee announcement, the Fed's statement that it was considering more quantitative easing had a big effect on bond- yield curves and such "open mouth" actions can still be effective policy, he said.

A number of economists, RGE's Nouriel Roubini among the most prominent, have said for a while that the Fed is out of policy bullets.

The US is not facing a liquidity trap that quantitative easing won't help, Roubini said in August.

The most important thing the Fed can do now is take some actions to manage price expectations, something that Japan got wrong, Kroszner said.

The Fed must "do enough to satisfy the market that (the economy's) not getting into a disinflation situation, but not do so much that inflation's going to explode," he said.

If the central bank had not taken action to help the economy, the US would be facing conditions similar to the depression of the 1930s, he said.

"Instead of having a crash landing (the recovery is) a little bit more gradual," he added.