Fed Kohn Says Economy May Stabilize in 2009

In a speech given at the University of Delaware on Monday, Fed Vice Chairman Donald Kohn offered an assessment on the U.S. economic recession. Mr. Kohn said that the pieces were falling into place for real GDP to decline at a slower rate in Fy2009 ; allowing for an economic recovery this year, with a chance it could be stronger than expected.

From The WSJ: “The crosscurrents in the recent data and a bit more favorable financial news of late stand in contrast to the uniformly bleak picture of a few months ago,” Mr. Kohn said. The developments “may be an early indication” that the economy’s contraction is slowing and it will stabilize later this year, he said.

While pointing out that after the shocks of 2008, credit markets were still going through a “massive restructuring,” leaving financial markets fragile and credit tight, Kohn stressed the Fed’s commitment to not hesitate in deploying new weapons to boost growth if the anticipated rebound falls short.

However, Mr. Kohn held out the possibility that a recovery could be stronger than expected.

“The recessions that occurred between the end of World War II and the 1980s were typically followed by high-growth recovery phases that relatively quickly pushed output back up to its prerecession level,” he said.

In addressing inflation, Kohn said that the Fed is “acutely aware” that the massive amounts of money it has injected into the economy to restore growth risks fueling uncomfortably higher inflation when the recovery takes off.

Reuters: “We are firmly committed to acting in a way that preserves price stability, and we believe we have the tools to absorb reserves and raise interest rates when needed,” he said.

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