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]