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Kohn Sees Better Growth in 2011, Headwinds ‘Abating’

Former Federal Reserve Vice Chairman Donald Kohn
Donald Kohn, seen here as vice chairman of the U.S. Federal Reserve. Photographer: Chris Rank/Bloomberg

Former Federal Reserve Vice Chairman Donald Kohn said impediments to economic growth are fading and the recovery should quicken next year.

“A number of those headwinds are abating,” Kohn said today at a meeting of the Urban Land Institute in Washington. Households are spending more, banks are beginning to “ease up” on lending and demand for labor will rise as productivity growth slows, he said.

Retail sales in the U.S. climbed more than forecast in September, easing concern that unemployment near a 26-year high will bring the recovery to a halt. Purchases rose 0.6 percent following a 0.7 percent gain in August that was larger than previously estimated, according to Commerce Department data issued today in Washington.

Kohn said the U.S. probably won’t relapse into recession and face a period of deflation, or a broad-based decline in prices. “Not a deflation, just very low inflation,” he said. “Not a recession, but sluggish growth.”

“My view is that deflation is a small risk, very small risk right now,” he said.

Treasuries fell, pushing up 30-year yields nine basis points to 4 percent at 2:03 p.m. The Standard & Poor’s 500 Index declined 0.2 percent to 1,171.65 in New York.

The U.S. can’t rely on exports to sustain the recovery, Kohn said, while expressing hope that “we get some loosening in” the valuation of yuan.

“The other countries that are running surpluses in their current accounts and have room to expand their domestic demand have to step into that void if the global economy is going to rise,” he said.

Into A ‘Void’

“It’s important for the global economy, as the U.S. consumer is not going to be the engine of spending and growth that we have been from the mid 90s to the late 2000s, that other countries are going to have to step into that void,” he said.

Kohn, 67, retired Sept. 1 after serving as the top monetary-policy strategist for former Fed Chairman Alan Greenspan and as Chairman Ben S. Bernanke’s chief lieutenant, guiding central bank efforts to stem the financial crisis, including unprecedented emergency credit programs.

Kohn is now a senior fellow at the Brookings Institution, a research organization based in Washington.

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