Don Kohn, the outgoing vice-chairman of the Federal Reserve, yesterday predicted that the recession would cause structural changes to Americans’ spending patterns and make the economy healthier over time.
“The US economy should emerge from this episode stronger, more resilient and on a more sustainable growth path than before the recession,” Mr Kohn said in a speech in San Francisco.
He said consumers would save more than in the past, credit would be less available and housing would be a smaller part of the economy.
“Households that have worked down debt levels will be less vulnerable and better able to withstand shocks in the future,” said Mr Kohn, who will be stepping down in June.
Janet Yellen, president of the San Francisco Fed, is considered the frontrunner to replace him.
Mr Kohn added that government policies would also play a role in promoting the transition to a more balanced economy.
Echoing comments made this week by Ben Bernanke, Fed chairman, Mr Kohn said the burgeoning US budget deficit would have to be addressed to prevent an increase in long-term interest and reduce America’s dependence on borrowing from foreign governments.
“Although fiscal policy has provided important support for the economic recovery, it will need to be put on a more sustainable path in the medium term,” he said.
Mr Kohn’s remarks came as he noted that the US economic recovery was “on track” but would be “gradual”, reiterating the position taken by Fed monetary policymakers in March that interest rates should remain at 0-0.25 per cent for an “extended period”.
Mr Kohn said the labour market was “extremely weak” despite the creation of 162,000 jobs in March, offering a similarly bleak picture of the unemployment problem as Mr Bernanke did this week. Mr Kohn also described the housing sector as being a “negative” in the economic picture. However, bright spots could be found in the “solid pace” of consumer spending and export growth.
His comments came a few hours before Mr Bernanke was set to deliver remarks comparing the government response to the financial crisis of 2008 with the Great Depression.
In prepared remarks, Mr Bernanke said that, unlike policymakers during the 1930s, his generation acted “with greater force” and creativity to stabilise the financial system.
By James Politi and Alan Rappeport in Washington
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