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Federal Reserve Vice Chairman Donald Kohn said the U.S. economy may stabilize in the second half and begin a slow rebound after a strengthening of “fragile” financial markets.

Consumer spending “appears to have steadied,” and the housing contraction has slowed, Kohn said yesterday at the University of Delaware in Newark. “These developments may be an early indication that conditions are falling into place” for real gross domestic product “to decline at a slower rate in the second quarter and to stabilize later this year,” he said.

Policy makers are trying to revive credit and end what may be the worst U.S. economic slump since World War II by holding the benchmark interest rate to as low as zero and extending credit to companies other than banks.

The Fed has used its balance sheet to back lending, money markets and securitization, expanding its total assets by $1.3 trillion over the past year to $2.19 trillion. Congress approved a $787 billion economic stimulus package in February that may pump $185 billion into the economy this year.

“We are still dealing with the consequences of the developments that precipitated the downturn,” Kohn said. “Accordingly, my best guess is that we are in for a relatively gradual recovery, though a very wide range of uncertainty surrounds that outlook.”

U.S. central bankers next meet April 28-29. At their March meeting, policy makers said they saw downside risks “predominating in the near term,” according to minutes released April 8.

‘Sharp Decline’

Kohn’s comments are in line with remarks last week from Fed Chairman Ben S. Bernanke, who said there are signs that the “sharp decline” in the U.S. economy is slowing, indicating a potential “first step” toward a recovery from the worst recession in a generation. Kohn’s speech provided a more- detailed economic outlook than Bernanke’s April 14 comments.

“Financial markets have improved some since last fall, though they remain disrupted and fragile,” Kohn said. “The path of the economy will depend critically on how quickly the current stresses in financial markets abate.”

Fed officials decided last month to boost purchases this year of mortgage-backed securities to $1.25 trillion, and housing agency bonds to $200 billion. The Fed’s Open Market Committee also voted to buy $300 billion of longer-term Treasury securities over the next six months.

The economy contracted at a 5 percent annual pace in the first quarter, according to a Bloomberg News survey, following a 6.3 percent downturn in the final quarter of 2008.

‘Major Hit’

Kohn said consumer confidence “took a major hit last fall, and my best guess is that it will recover slowly along with the financial markets and the economy.” Consumer confidence rose in April, according to a preliminary reading of an index tracked by Reuters/University of Michigan. The April sentiment reading rose to 61.9, up from 57.3 in March and a three-decade low of 55.3 in November.

“Once financial conditions stabilize, the economy regains its footing, and households sense that better prospects lie ahead, confidence could rebound more vigorously, leading to a more rapid pickup in purchases,” Kohn said online instant cash advance.

The inventory of U.S. single-family homes, townhouses and condominiums decreased to a 9.7 month supply in February, down from 11.3 months in April last year as lower mortgage rates and lower home prices spurred purchases.

‘Nearing an End’

“Recent data suggest that the multiyear contraction in home sales and new construction may be nearing an end,” Kohn said. That may aid the economy, yet “because inventories of unsold homes are still very high relative to sales, it may take a while for any pickup in demand to translate into higher production,” he said.

In response to an audience question, Kohn said that because of a large inventory of unsold houses, “we’re going to continue to see at least some downward pressure on prices.”

The recession that began in December 2007 has come at a high cost to U.S. growth, employment and wealth.

Unemployment rose to 8.5 percent in March, the highest since 1983. U.S. home prices fell 8.2 percent in 2008, according to the Federal Housing Finance Agency. Household net worth fell $11.2 trillion in 2008, according to Fed data.

Even so, “I don’t think it is premature to start to ponder the shape that a recovery — when it occurs — would be likely to take,” Kohn said.

‘Sizable Risks’

Another obstacle for the Fed is that “there are sizable risks on both sides of the inflation forecast,” Kohn said. Without mentioning the word deflation, he said that “substantial declines in inflation would raise real interest rates.”

At the same time, “my colleagues and I are acutely aware of the risk of higher inflation as the economic recovery gains speed,” Kohn said.

The Fed is ready to raise interest rates “when needed,” he said, reiterating that the central bank is working with the Treasury Department to seek legislation that would help the Fed tighten credit after adding more than $1 trillion in assets to its balance sheet.

Raising rates will also come with “a lot of criticism” from U.S. lawmakers, Kohn said in response to an audience question. “I’m sure we will live up to our obligations as public servants whatever the criticism,” Kohn said.

The consumer price index fell 0.4 percent in March from a year before, the first annual decline since 1955. The personal consumption expenditures price index rose 1.8 percent for the year ending February, within a range preferred by several Fed officials.

Kohn, 66, is the longest-serving Fed Board member. He became a governor in 2002 after serving as a top policy adviser to former chairman Alan Greenspan. He was sworn in as vice chairman in June 2006. He started his career at the Kansas City Fed in 1970.

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