In a carefully-worded speech delivered in Newark, Delaware yesterday, Federal Reserve vice chairman Donald Kohn suggested that economic recovery likely would be gradual coming out of the current recession and suggested that inflation concerns were likely overstated. Pundits hoping for a so-called V-shaped rebound in economic activity are likely to be disappointed, Kohn suggested. "My best guess is that we are in for a relatively gradual recovery, though a very wide range of uncertainty surrounds that outlook," he said. Part of that uncertainty stems from a continued lack of activity in secondary markets via securitization activity. "After the recent experience, there is likely to be less reliance on securitization markets to intermediate credit flows and more reliance on banks and other intermediaries. But those intermediaries are still rebuilding the capital and liquidity positions they need to substantially increase their participation in credit markets," he said. See his full remarks. Saying that inflation concerns in the near term are likely to remain at bay, Kohn signaled Fed wariness of risks on both sides: both inflationary and deflationary, although deflation clearly seems to be front-and-center at the Fed right now. "We cannot rule out the possibility that adverse economic conditions will cause deeper cuts in prices, a greater softening in wages, and a steep decline in inflation expectations," he admitted. "Substantial declines in inflation would raise real interest rates, thereby restraining the recovery even more. Moreover, the risk that inflation could be lower will be exacerbated to the extent that economic activity falls short of [current expectations] ... "But my colleagues and I are acutely aware of the risk of higher inflation as the economic recovery gains speed." In other words, as some commentators have suggested, the Fed is willing to play with fire to fight what it sees as a strong near-term threat of deflation; even if such actions set the stage for future inflation, Kohn's remarks suggest both that it's a risk officials are willing to run and that it's a risk the Fed feels it can control going forward--as many of the liquidity programs put into place via Bernanke's now-infamous "credit easing" policy can be withdrawn quickly, in theory making it possible to absorb currency supplies more quickly than might otherwise be the case. Numerous papers and letters I've seen recently from various investment funds agree with Kohn's assessment, in that deflation is by far the larger threat relative to any future threat of hyperinflation. Write to Paul Jackson at