donald l kohn : economic outlook remarks by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the money marketeers of new york university, new york, new york, 4 october 2006. * * * i am pleased to be with you tonight to discuss my views on current economic conditions and the economic outlook. these have been challenging times for economic forecasters and policymakers. since the summer of 2005, the economy has absorbed a wide variety of shocks - major hurricanes, ongoing geopolitical tensions, and substantial increases in energy prices - and has adapted to a rise in short - term interest rates to more normal levels. yet real gross domestic product ( gdp ) increased a respectable 3 - 1 / 2 percent from the second quarter of 2005 to the second quarter of 2006, and the unemployment rate fell to 4 - 3 / 4 percent. at the same time, however, headline consumer price inflation has been quite high, and an upward movement in core inflation has raised concerns about the persistence in price pressures, a very worrisome development from the point of view of a monetary policy maker. the economic outlook for the next few years will be importantly shaped by ongoing responses to these developments. reflecting those responses, economic activity has slowed noticeably over the course of the year, and inflation, though down from its level earlier this year, remains uncomfortably elevated. however, i expect that the continuing adjustment will be relatively benign overall : 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. in addition, as the cost pressures from the run - up in energy and materials prices begin to play out, or perhaps even partly reverse, and as pressures on resources ease slightly, i think we will likely see much lower headline inflation and a gradual diminution of core consumer price inflation. i know that to some this story of a soft landing seems too good to be true - the triumph of hope over experience. one question is whether it is even feasible. can inflation pressures decrease with only a modest shortfall of economic growth from potential? and is it possible that a modest decline in resource utilization will not cumulate into something more serious, as it has tended to do in the past at least without a major adjustment of policy? my view is that this economy is capable of generating the type of favorable outcome that i have just sketched, but, as in any period of transition,

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