WASHINGTON -- Federal Reserve Governor Donald Kohn warned on Wednesday that the U.S. current account deficit and surge in house prices may not be sustainable and urged banks to
shield themselves against unlikely but potentially harmful events. "Our economy is in unexplored territory in many respects," he said in remarks prepared for delivery to the Bankers
Association for Finance and Trade and the Institute of International Bankers. "The risk of rapid adjustments and unusual configurations of asset price movements is higher than normal," he said in remarks to be delivered in New York. A copy of the speech was made available in Washington.

Kohn's comments echo stepped-up warnings from Fed officials, including Chairman Alan Greenspan in recent weeks, that a swift rise in U.S. real estate values may not last and may have
led to speculative behavior and risky lending practices. Kohn said low long-term interest rates have fanned the four-year

U.S. housing boom, with home buyers rushing to take advantage of historically cheap credit. But he also said the Fed's focus on keeping inflation low may not always maintain stable prices
for some assets.

"Our capabilities are limited; ultimately we are working with only the overnight interest rate and we concentrate on the price level more generally, which may not always be compatible with the
stability of the prices of particular assets," he said. Higher mortgage rates have long been expected to cool off housing markets by raising interest payments for home buyers. However,
Fed officials have been at a loss to explain why a series of increases in short-term rates has not yet pushed up long-term interest rates.

Kohn said he believes economic swings have been less dramatic since the early 1980s, adding he expected a pattern of generally favorable economic performance in coming years. But the U.
S. economy is now facing some "unusual imbalances," some of which have been generated by economic strength, he said. Americans buy more than they produce, and the current account
deficit has risen to more than 6 percent of the gross domestic product, Kohn said. Americans save little, and their spending has been spurred by the rapid rise in house prices -- a byproduct
of low interest rates, he said.

The growing deficit and climbing home values cannot continue indefinitely, he said. Global investors will eventually seek higher rates of return from dollar assets, and house price gains
will slow as they become disproportionate to incomes and rents, he said. Kohn said he believes there will be an orderly adjustment to more sustainable spending and saving patterns. But even
so, he urged banks to buffer themselves against unusual and possibly extreme developments, known as "tail" events because they are at the edges of the bell-shaped curve that analysts use
to chart the likelihood of their occurrence. "We are in uncharted territory with respect to many aspects of our macroeconomic environment. Prudent risk managers recognize the potential for
tail events and prepare for that possibility," Kohn said.