Fed's Kohn sees Europe risk, but to pull through: report

Europe's fiscal problems are a risk that will have some effect on U.S. growth during the rest of this year and 2011, U.S. Federal Reserve vice chairman Donald Kohn said in an interview with the Wall Street Journal.

Kohn, 67, who is retiring after 40 years as a central banker, was right-hand man to former chairman Alan Greenspan and has been involved in important decisions in the financial crisis alongside current chairman Ben Bernanke.

Europe is a risk, the WSJ quoted Kohn as saying. My best guess is that they'll make it through. The authorities are determined to stabilize the situation. They've taken a lot of steps.

Kohn said that the problems in Europe will have some effect on U.S. growth over the balance of this year and next year.

European finance ministers agreed last month to a record 110 billion euro ($147 billion) bailout for debt-stricken Greece and have teamed with the International Monetary Fund to try to keep the Greek crisis from spreading. The uncertainty over how widely Europe's debt woes might spread has weighed on markets.

Looking back on his years at the Fed, Kohn -- who served as a top Lieutenant to former Fed chief Alan Greenspan before moving into the No. 2 spot -- said history would judge Greenspan's interest-rate decisions well. But Kohn expressed doubt about using higher interest rates to fight bubbles.

I have yet to be convinced that we can lean against these bubbles with monetary policy in a predictable and productive way, Kohn said. I'm not arguing that monetary policy has to be focused only on the inflation rate two or three years from now. I think we need to be flexible.

Kohn told WSJ the Federal Reserve needs to be on the lookout for issues developing that threaten financial stability and suggested that regulators need to react faster.

We spotted a number of developing problems, but the financial supervisory community didn't come down hard enough, soon enough, on those problems. Partly this was a function of the need to find common ground among the regulators, he said.

Kohn was set to depart on June 23 but the Fed said last week he would stay on until a successor was in place, but no later than September 1.