Federal Reserve Vice Chairman Donald Kohn said on Friday moderate growth should return to the U.S. economy after a period of weakness due to a prolonged housing slump and higher borrowing costs.
"Once we get through the near-term weakness caused by the extra downleg from the housing contraction and any spillover from tighter credit conditions, I am looking for moderate growth with high levels of employment," Kohn told the Greater Philadelphia Chamber of Commerce.
The Fed's half-percentage point interest rate cut was necessary to offset tighter credit conditions and encourage moderate growth but will not prevent further softness in parts of the economy, Kohn said.
"Our policy action will not be able to avert all of the weakness in the economy that may be in train for the next several months," he said. "In particular, housing markets are likely to remain depressed in coming months."
Some of the most disrupted financial markets have shown signs of improvement since the Fed's September 18 meeting, Kohn said. But recent market turmoil will raise the cost and constrain the availability of credit for households and businesses, even after market functioning improves, he said.
"It would not be surprising to see less-generous credit for a wide variety of loans to businesses and households," Kohn said.
It is too early to say what effect financial market turmoil is having on household and business spending, but initial signs suggest the effects have been limited, the Fed official said. However, a combination of tighter credit, lower consumer confidence and business cautiousness are likely to subdue demand in coming months, he said.