Fed Kohn Warns on the Intensifying Risks of Deflation

Fed Vice Chairman Donald Kohn, in comments made Friday at the College of Wooster in Ohio, his alma mater, said the U.S. economy is likely to remain very weak for a while, and warned in starker terms than he has before about the risk of deflation.

“Many financial markets remain under considerable stress,” Mr. Kohn said, noting that the value of assets — such as stocks and homes — has fallen and credit is still tight for firms and households. “These conditions are not conducive to a substantial and sustained economic rebound.”

The Fed’s number two policy-maker warned that with short-term interest rates about as low as they can go, there is a chance real interest rates could increase—at the worst possible time for the struggling economy. “If such a process continued for some time, we could fall into deflation, much as Japan did for a time in the 1990s and earlier this decade.” [via WSJ]

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