Kohn: Recovery Moderate, Will Be Stronger in 2010

Economic recovery will be moderate this year with some strengthening next year, but we will not see a V-shaped recovery that typically follows a deep recession, Federal Reserve Board vice chairman Donald Kohn said yesterday.

Tight credit conditions and impaired securitization markets, despite improved financial conditions, will slow the recovery, Kohn told the National Association for Business Economics, according to text released by the Fed.

The Federal Open Market Committee expects unusually low interest rate levels for an extended period, Kohn noted, while warning that the panel will “be looking carefully at any evidence that portends a potential pickup of inflation.”

While questions and fears about the economy are not as great as they were several months ago, according to Kohn, “uncertainty remains quite high; we are still in largely uncharted waters when it comes to fully understanding how our economy will recover from the severe recession and financial disruptions of the past several years and how that recovery and inflation will be affected by the extraordinary actions we took.” 

“We need to base policy on our best estimate of the evolution of inflation and output relative to our objectives, but we also need to be ready to adjust our plans if events don’t turn out as predicted in either direction,” Kohn said.

“We have the tools to exit our unusual policies when the time comes. And we must act well before demand pressures or inflation expectations threaten price stability.”

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