The U.S. economy and job market will rebound only gradually because of ongoing constraints on lending, Federal Reserve Board Vice Chairman Donald Kohn said on Sunday.
This means inflation will remain contained for some time, he said in prepared remarks to the annual meeting of the American Economic Association.
Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow, said Kohn, a senior and influential figure at the central bank.
The U.S. economy expanded 2.2 percent in the third quarter but only after registering its worst recession since the 1930s.
Kohn said the Fed's extraordinary stimulus measures, which included lowering interest rates to near zero and developing a host of unconventional lending facilities, helped engender that recovery.
He said that the Fed would have to begin pulling back, however, before things were completely back to normal.
We will need to begin withdrawing extraordinary monetary stimulus well before the economy returns to high levels of resource utilization, he said.
Kohn said the Fed had plenty of tools to accomplish this feat, including paying interest on the reserves that banks keep at the Fed.
Kohn also said it may be appropriate, if very difficult, to counter an apparently destabilizing spike in prices but argued that regulation, and not monetary policy, would be the best way to accomplish that.
In the current situation, with output expected to be well below its potential for some time and inflation likely to be under the 2-percent level that many (Federal Open Market Committee) participants see as desirable over the long run, tightening policy to head off a perceived threat of asset price misalignment could be expensive in terms of medium-term economic stability, he said.