by Calculated Risk on 5/16/2005 11:04:00 PM

Speaking to the Australian Business Economists in Sydney tonight (via videoconferencing), Federal Reserve Governor Donald Kohn made several remarks concerning US interest rates:

"We have not yet finished this task," [Kohn] said.

"The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run.

"And if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace."

Further Fed changes to interest rates should induce an increase in the personal savings rate, by increasing a return to saving and dampening the upward momentum in housing prices, Dr Kohn said.

Higher rates would thereby lessen one of the significant spending imbalances in the US economy.

Dr Kohn said there were a number of spending imbalances in the US economy, but that at the most aggregated level there were a large and growing discrepancy between what the US spent and what it produced, as measured by the current account deficit.

"The growing current account deficit has been associated with a pronounced decline in the savings proclivities of the private and public sectors over the last year," he said.

"Households have saved only about one per cent of their after-tax income, and that compares to about eight per cent on average from 1950 to 2000."

Hat tip to The Housing Bubble's Ben Jones for the article.