Fed's Duke says rates to stay low while economy weak

WASHINGTON, April 16 Tue Apr 16, 2013 2:05pm EDT

WASHINGTON, April 16 (Reuters) - A top U.S. Federal Reserve official told a group of community bankers on Tuesday that regulators recognize that low interest rates can cause difficulties for banks but said rates should stay low until the economy improves.

Keeping interest rates low has helped keep many borrowers from missing loan payments even as the Fed's actions may be squeezing profits at some banks, Fed Governor Elizabeth Duke said at an American Bankers Association conference.

"Frankly, I would very much like to see higher rates, if higher rates went higher because the economy was stronger," Duke said. "I think to raise rates or to let rates rise in a very weak economy would ... make the environment that much more difficult."

Duke said the banking industry appears to be stronger after the 2007-09 financial crisis, with higher capital and liquidity levels in place and bank portfolios improving.

But she said low loan demand is hurting bank earnings.

"I hear that banks just won't lend or don't want to lend. I find no evidence of that," Duke said. "What I find is evidence of intense competition for loans, and the rest of you are making all the loans you can find to make."

She said the one exception could be in mortgage lending, where credit remains tight.

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