DJ Fed's Kohn: Econ Beginning To Show Signs Might Be Stabilizing
WASHINGTON (Dow Jones)--Federal Reserve Vice Chairman Donald Kohn said Saturday the U.S. economy might be showing some signs of stabilization, but that rate hikes won't be coming anytime soon given the expected weakness of the eventual recovery.
"In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households," Kohn said in prepared remarks to a conference at Princeton University in New Jersey.
His views seem slightly less upbeat than the views provided by the Fed staff the during the April 28-29 meeting of the Federal Open Market Committee, which noted "some tentative evidence that the pace of contraction in real economic activity was starting to diminish."
Kohn also reiterated the FOMC's stance from the last meeting that the federal funds rate will likely remain in a range around zero for an extended period.
"As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate," he said.
Still, he cited some "preliminary evidence" suggesting that the Fed's program to buy up to $1.75 trillion in securities has helped hold down longer-term interest rates.
Kohn defended such nontraditional policy measures as "necessary to avert a far worse economic outcome," and said they are consistent with traditional monetary policy goals.
In addition, he said the policies have been designed to have "few, if any fiscal consequences."
He acknowledged that holding such a large portfolio exposes the Fed, and taxpayers, to potential losses if short-term rates rise. But he said the steep yield curve is resulting in a high return for the Fed, and that tax revenues will be higher than they would have been without the stimulus from the Fed actions.
Another result of the Fed's near-zero rate policy is that fiscal stimulus has the potential to become more effective, Kohn said.
"In this situation, fiscal stimulus could lead to a considerably smaller increase in long-term interest rates and the foreign exchange value of the dollar, and to smaller decreases in asset prices, than under more normal circumstances," he said.
-By Tom Barkley, Dow Jones Newswires; 202-862-9275; tom.barkley@dowjones.com
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