By Jim Christie
SAN FRANCISCO, April 8 (Reuters) - A gradual U.S. economic recovery marked by high unemployment and tame inflation will require interest rates to remain very low for an 'extended period,' Federal Reserve Vice Chairman Donald Kohn said on Thursday.
The Fed's promise to keep rates low, however, is contingent
on economic conditions, such as an absence of strong private demand and a reluctance by businesses to hire, Kohn indicated.
'We cannot provide a precise timetable for when short-term interest rates will begin to return to normal because that depends on the evolution of actual and projected activity and inflation,' Kohn said in prepared remarks to a luncheon sponsored by the Federal Reserve Bank of San Francisco.
For now, Kohn said conditions do appear to warrant the central bank's highly accommodative stance, undertaken as a response to the worst financial crisis since the Great Depression.
In particular, Kohn focused on the labor market, which he characterized as 'extremely weak.'
'The most likely scenario is a gradual pickup in economic activity,' he said.
Against that backdrop, Kohn believes inflation will not become a problem any time soon. He said the high jobless rate, which came in at 9.7 percent in March, suggested the economy was not operating anywhere near its maximum productive capacity.
Nonetheless, Kohn acknowledged that the sharp increase in bank reserves generated by the Fed's unconventional policy easing measures created uncertainty about how an eventual tightening might proceed.
'Given the lags in monetary policy, that means we will not be able to wait until the unemployment rate is down close to its long-term level,' he said.
'As the expansion matures, we will need to withdraw monetary stimulus to prevent the development of inflationary pressures,' Kohn added.
(Editing by Andrew Hay)
((For more stories on Fed policy go to))
(Reporting by Jim Christie; Writing by Pedro Nicolaci da Costa) Keywords: USA FED/KOHN (pedro.dacosta@thomsonreuters.com; +1 202 354-5820; Reuters Messaging: pedro.dacosta.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
SAN FRANCISCO, April 8 (Reuters) - A gradual U.S. economic recovery marked by high unemployment and tame inflation will require interest rates to remain very low for an 'extended period,' Federal Reserve Vice Chairman Donald Kohn said on Thursday.
The Fed's promise to keep rates low, however, is contingent
on economic conditions, such as an absence of strong private demand and a reluctance by businesses to hire, Kohn indicated.
'We cannot provide a precise timetable for when short-term interest rates will begin to return to normal because that depends on the evolution of actual and projected activity and inflation,' Kohn said in prepared remarks to a luncheon sponsored by the Federal Reserve Bank of San Francisco.
For now, Kohn said conditions do appear to warrant the central bank's highly accommodative stance, undertaken as a response to the worst financial crisis since the Great Depression.
In particular, Kohn focused on the labor market, which he characterized as 'extremely weak.'
'The most likely scenario is a gradual pickup in economic activity,' he said.
Against that backdrop, Kohn believes inflation will not become a problem any time soon. He said the high jobless rate, which came in at 9.7 percent in March, suggested the economy was not operating anywhere near its maximum productive capacity.
Nonetheless, Kohn acknowledged that the sharp increase in bank reserves generated by the Fed's unconventional policy easing measures created uncertainty about how an eventual tightening might proceed.
'Given the lags in monetary policy, that means we will not be able to wait until the unemployment rate is down close to its long-term level,' he said.
'As the expansion matures, we will need to withdraw monetary stimulus to prevent the development of inflationary pressures,' Kohn added.
(Editing by Andrew Hay)
((For more stories on Fed policy go to))
(Reporting by Jim Christie; Writing by Pedro Nicolaci da Costa) Keywords: USA FED/KOHN (pedro.dacosta@thomsonreuters.com; +1 202 354-5820; Reuters Messaging: pedro.dacosta.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.