02/27/2008

News / Weak US economy "bigger risk" than inflation

A top Federal Reserve official said the danger the US economy will weaken further is a bigger worry than higher inflation, and the central bank has the tools and is ready to do what it needs to do to respond to "difficult times."


"I do not expect the recent elevated inflation rates to persist," Fed Vice Chairman Donald Kohn said in a speech at the University of North Carolina at Wilmington.

"In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States," he said.

The recovery in shaky financial markets is likely to take time, and the correction in the beleaguered housing sector has further to go, Kohn said.

Although he expects recovery after a sluggish period, policy-makers must take into account the possibility of "very unfavourable developments," he added.

"We have the tools," Kohn said. "As Chairman Bernanke often emphasizes: We will do what is needed."

Kohn's remarks gave a boost to stocks on the view that his remarks signaled the Fed is prepared to deliver more rate cuts to support the economy, pushing the Dow Jones industrial average up more than 1 per cent.

Recent higher readings on inflation, such as the 4.3 per cent year-on-year rise in the consumer price index in January, are "disappointing," Kohn said. Signs inflation has ticked higher suggest the higher costs of energy, imports, and possibly commodities, may be passing through to core consumer prices, he said.

But Kohn said inflation expectations have appeared "reasonably well anchored" – giving room for the Fed to focus on supporting economic growth. Even so, the central bank will continue to monitor the inflation situation "very carefully," he added.

Kohn's remarks come a day before Fed Chairman Ben Bernanke delivers semi-annual testimony on the outlook for the economy and interest rates before Congress.

In economic projections released last week, the US central bank lowered its growth forecasts for 2008 and raised its projections for unemployment and inflation in the year.

Source: http://www.stuff.co.nz/stuff/4417792a6026.html

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