Fed's Hidden Playbook: Don Kohn's 1990 Nominal GDP Targeting Strategy Resurfaces Amid Oil Shock

A forgotten internal proposal from the 1990 Gulf War era has re-emerged as a potential framework for the Federal Reserve's current policy dilemma. Dario Perkins of TS Lombard, analyzing historical Fed transcripts, uncovered a strategy articulated by then-senior Fed staffer Don Kohn. The 'Kohn Solution' centers on using nominal GDP growth as the decisive guide for interest rate policy during an oil price shock—a scenario that simultaneously stokes inflation and threatens to slow economic growth.

Kohn's logic provides a clear, rule-based response to the central bank's present uncertainty. His proposal argues that if rising oil prices boost inflation but also dampen growth, and the two forces roughly offset each other, the Fed should hold interest rates steady. However, the critical directive emerges when one force dominates: the Fed should 'hike if nominal GDP growth rises' and 'cut if nominal GDP growth falls.' This effectively distinguishes between a demand-driven shock, requiring tighter policy, and a supply-side shock, which might warrant easing.

The resurrection of this three-decade-old internal debate signals the intense scrutiny and pressure on the Fed as it navigates the conflicting signals of today's energy market turmoil. It highlights a historical precedent for a more formulaic approach, contrasting with the current discretionary, data-dependent stance. While not an adopted policy, the framework's rediscovery adds a concrete, historical dimension to the ongoing debate over how central banks should untangle supply shocks from demand pressures without derailing the economy.