Federal Reserve Vice Chairman Donald Kohn on Tuesday said he foresees an improving economy into 2010 with a minimal risk of inflation.
In a speech to the National Association for Business Economics in St. Louis, Kohn said, "The data that we have in hand indicate that economic activity turned up in the third quarter," adding later in the speech, "I expect that the recovery in U.S. economic activity will proceed at a moderate pace in the second half of this year before strengthening some in 2010."
Referring to the concept that much of the output potential of the economy remains unused, he minimized the danger of inflation setting in even as federal deficits balloon and Congress continues to spend borrowed money."Even as the economy begins to recover, substantial slack in resource utilization is likely to continue to damp cost pressures and maintain a competitive pricing environment," he said. "I expect that the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time."
He tempered that statement later in his prepared remarks, saying, "This assessment and my outlook do not mean that my colleagues and I will not also be looking carefully at any evidence that portends a potential pick up of inflation."
Kohn said he was encouraged by the recent firming in house prices, which he said could not only steady net worth of households and, thereby, consumer spending but also help stabilize the still moribund market for mortgage paper and mortgage-backed securities, which could spur banks holding that paper to lend more.
However, Kohn was not particularly bullish on home building. "I do not anticipate that the recovery in homebuilding will exhibit its typical cyclical pattern," he said. "Even though the decline in residential construction began well in advance of the overall contraction in real activity, the sector continues to have an oversupply of vacant homes ...Thus, even with affordability quite favorable and house price expectations brighter, I anticipate a relatively subdued pickup in housing starts over the coming year."