The Fed vice-chairman stressed he did not believe deflation was the most likely outcome for the US economy, but was a “less remote” possibility than he previously thought.
“Some people have argued that we should save our ammunition, that interest rate cuts aren’t effective,’’ Mr Kohn said. “I think that were we to see this possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be.”
He is saying 2 things.
1- less remote possibility of deflation.
When financial types talk about possibility and probability they are speaking in well defined mathematical terms. The world of future possibles, the enumeration of possible states that an economy can reach in the future is a Hilbert space of configuration. In some worlds we are experiencing hyper inflation, in another world war and famine and yet in others peaceful existence in sustenance. These are possible world, possibilities. Then the possibility has a probability. The probability denotes how many time the given world appears in the world of possibles (3 out of 10). This is standard talk for quantum physicists where the "world of possibles" is in fact what drives the dynamics of the particles. Another way of saying what Kohn is saying is "the probability of deflation, a possible, has increased".
2- as aggressive as we can be.
The FED has just declared that it will whack deflation as energetically as does inflation. The main goal of the FED is price stability. Deflation is bad because it makes debt very heavy and it depresses spending in a strongly reinforcing negative feedback loop. So the FED will fight that sea monster and has a good 3T of ammunition. Many argue that merely replacing private debt with public is not what is needed. USSR of A is going to be a good place to live in given the infrastructure spending that is going to go on.
There is no telling if it will be enough. We know it is in that ballpark.