Posted By thestatedtruth.com on January 3, 2010

Jan. 3 (Bloomberg) — Federal Reserve Vice Chairman Donald Kohn said tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets.

“Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual and the drop in the unemployment rate to be slow,” Kohn said today in a speech to the American Economic Association in Atlanta.

Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent for a year to support an economy that is recovering from the worst recession since the Great Depression.

“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said. He also said the central bank won’t keep rates low to help finance government spending.

“A large and growing federal deficit will not stop the Federal Reserve from exiting from current policies when that’s needed to keep prices stable and the economy on a path to sustained high employment,” Kohn said.

The U.S. central bank, attempting to restore liquidity and credit, has expanded its balance sheet to $2.24 trillion from $858 billion at the start of 2007. As a result of the Fed’s purchases of $1.7 trillion in mortgage-backed, federal agency, and Treasury bonds, banks hold more than $1 trillion in reserves in excess of what they’re required to hold against deposits.

Central bankers are discussing how they will eventually exit their low-rate policy and drain excess cash in the banking system to head off inflation. At their December meeting, they said they would shut down emergency lending programs for commercial paper issuers and bond dealers in February as credit has become more available.

“We have no shortage of tools for firming the stance of policy, and we will be able to unwind our actions when and as appropriate,” Kohn said. “The appropriate use and sequencing of these tools is under active discussion by the FOMC.”

Banks haven’t started to circulate the reserves. Loans and leases of commercial banks in the U.S. declined to $6.8 trillion in November from $7.2 trillion a year earlier, according to Fed data.

More at…..http://www.bloomberg.com/apps/news?pid=20601087&sid=a6jsKMNzpqH0&pos=3

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