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Top Fed official hints at rate cut in December

NEW YORK – THE Federal Reserve’s second-in-command on Wednesday signalled a readiness to cut interest rates again, acknowledging that financial market turmoil could slow the United States economy and that the central bank must be flexible.

‘Uncertainties about the economic outlook are unusually high right now,’ Fed vice-chairman Donald Kohn told the Council on Foreign Relations in New York. ‘These uncertainties require flexible and pragmatic policymaking – nimble is the adjective I used a few weeks ago.’

US banks have written off billions of dollars in recent weeks due to losses in the sub-prime credit market, provoking fresh turmoil in financial markets that had only just recovered from the extreme jitters set off by credit fears in August.

Mr Kohn sent Wall Street stocks soaring, with the Dow Jones Industrial Average advancing by more than 300 points, as investors read his remarks as a strong hint of another quarter-point cut at the next Fed rate-setting meeting on Dec 11.

His sober assessment also coincided with a separate Fed report underlining the drag being exerted on the wider US economy by the weak housing sector.

Mr Kohn explicitly pointed to the deterioration since the Fed last met to discuss policy, on Oct 30 and Oct 31.

At that meeting, it lowered rates by a quarter of a point to 4.5 per cent, but said the risks to growth and inflation were roughly balanced.

Since then, investors have grown alarmed by weak economic data, opening a clear divergence between market expectations for future rate cuts and the impression created by the Fed in October that its easing campaign was finished.

Mr Kohn helped to close that gap by acknowledging that the recent drying up of liquidity, as banks hoard cash to offset further possible credit-related losses, had caught him off guard and was a cause for concern.

‘I have to admit that, speaking for myself…the degree of deterioration that has happened over the last couple of weeks was not something that I had personally anticipated,’ he said in response to questions after his speech.

‘Financial institutions became more cautious, and I think this process is one that we are going to have to take a look at when we meet in a couple of weeks,’ he said, adding the central bank was looking at ‘lots’ of different ways to supply liquidity to the markets.

 

Source: REUTERS (The Straits Times 30 Nov 07)

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