Federal Reserve Vice-Chairman Donald Kohn said Wednesday (Oct. 5) that it appears the U.S. economy appears is on the verge of achieving a fabled “soft landing” of moderate growth and gradually lower inflation, according to a CBS MarketWatch report.
“I expect that the continuing adjustment will be relatively benign overall,” Kohn said in remarks prepared for a business group in New York. “The economy will grow at a moderate pace for a while, somewhat below the rate of increase of its potential, and then growth will begin to strengthen. I think we will likely see much lower headline inflation and a gradual diminution of core consumer price inflation.”
But there are heightened risks on both sides of his forecast, Kohn said. He said the risks to his outlook for growth are tilted a bit to the downside, and the risks to his inflation outlook are tilted to the upside.
He expressed surprise that financial markets don’t seem to share his sense of uncertainty about the proper level of short-term interest rates.
Financial markets, as viewed by the Fed funds futures market, are making a one-way bet. They believe the Fed is finished tightening in this cycle and have priced in a rate cut some time in the first quarter.
“Obviously, as my FOMC voting record indicates, I believe that for now, the current level of short-term interest rates has the best chance of fostering this outcome (of a soft landing), ” Kohn said.
But policy adjustment will depend on the implications of incoming data to his forecast, he said.
After 17 straight meetings with a rate hike, the FOMC called a halt in August and September. But there was one dissent at each meeting in favor of higher rates. Kohn said that the upside risk of inflation is the dominant concern at the moment.
But he did not seem to buy into the inflation fears expressed by some Wall Street economists.
“I think the odds favor a gradual reduction in core inflation over the next year or so,” Kohn said.