Fed's Kohn: Economic rebalancing prevents turmoil

WASHINGTON (Reuters) - A top Federal Reserve official warned on Tuesday that economies around the world must further rebalance their inward and outward capital flows to prevent a repeat of the damaging crisis of 2007-2008.

The U.S. economy will need to be driven less by consumption and housing, and exports and capital will need to play a larger role in the economy, Fed Vice Chairman Donald Kohn said in remarks prepared for delivery to a Swiss National Bank-International Monetary Fund conference in Switzerland.

The United States must put its budget deficit on a more sustainable path as part of that rebalancing, Kohn said.

Other economies will have to boost domestic demand and reduce excessive saving, and flexible exchange rates are necessary to adapt to those changes, he said.

Kohn did not address the outlook for U.S. monetary policy in his remarks.

The Fed's No. 2, who is due to step down next month, said strong capital inflows into the United States, mixed with bank regulatory shortcomings and gaps and low interest rates contributed to conditions that led to the financial turmoil.

"Global financial imbalances contributed to important macroeconomic and financial vulnerabilities and, hence, to the emergence of the global financial crisis," he said. "A more sustainable and balanced global economy ... is necessary to reduce the risk of future crises."

(Reporting by Mark Felsenthal; editing by Leslie Adler)