Kohn Says Central Bank Can Cut Odds of Disruptive Current-Account Change
Federal Reserve Board Vice Chairman Donald Kohn said the central bank must keep inflation expectations contained to help reduce the chance of a disruptive narrowing in the U.S. current-account deficit.
"As long as inflation expectations remain contained, relatively faster growth of the prices of imported goods for a time would be associated with only a temporary bulge in inflation and would result in a needed change in relative prices," Kohn said in the text of a speech in London.
Kohn didn't comment on the near-term outlook for the U.S. economy or interest rates in his prepared remarks, instead focusing on longer-term issues. The deficit, the broadest measure of trade, shrank in the first quarter to $208.7 billion from a record $223.1 billion in the previous three months. The U.S. needs to attract about $2.3 billion a day to fund the gap, and any shortfall would undermine the value of the dollar.
"Although private and government demands for dollar assets have allowed the U.S. current account deficit and foreign surpluses to persist, these imbalances are not sustainable indefinitely," Kohn said in his first public remarks since he was sworn in last month as vice chairman, succeeding Roger Ferguson, who resigned in April after more than six years in the position.
"The transition to a more sustainable configuration is not likely to be disruptive," Kohn said." "But we cannot be sure," he said. "The world economy is in uncharted territory with regard to the size of the imbalances."
Kohn said Fed Chairman Ben S. Bernanke will discuss the "immediate outlook for activity and prices in the United States and the global economy more generally, and the recent conduct of monetary policy," when Bernanke testifies before Congress on July 19 and 20.
Last week, the Fed raised the benchmark U.S. interest rate to 5.25 percent, the 17th straight increase, to counter rising inflation. The central bank said further increases depend on future information about the prospects for growth and inflation.
President George W. Bush named Kohn, 63, who has worked in the Fed system since 1970, as a Fed governor in 2002. He had served as the Fed's chief monetary strategist from 1987 to 2001, advising then-chairman Alan Greenspan. Bush nominated Kohn as vice chairman in May.
Last month, Kohn said in a speech that globalization has helped restrain price increases in the U.S. through lower import prices and some "dampening" of unit labor prices as the supply of low-skilled labor becomes more abundant.
