Fed's Stern says credit rescue moves will succeed

By Ros Krasny

CHICAGO (Reuters) - The Federal Reserve's steps to unlock frozen global credit markets should succeed over time in solving "a bear of a problem," Minneapolis Fed President Gary Stern said on Tuesday.

The U.S. central bank runs a risk that steps taken in financial markets, while "appropriate" to deal with a year-long crisis, will create more instability, Stern said in a speech to the Council of Institutional Investors meeting here.

For now, though, the Fed must deal with the crisis at hand, said Stern, a voting member of the Federal Open Market Committee in 2008 and the Fed's longest-serving regional president.

"You want to address 'too big to fail' when financial conditions are cranking," he said. "In the middle of turmoil you have to do a quick cost-benefit analysis."

Stern said the "flexible" approach by the Fed and Treasury to handle the unrelenting financial market crisis that erupted in August 2007 has been correct given the lack of a clear path ahead.

"This is an unprecedented series of events in my long career at the Fed ... you can't just pull out a handbook and say 'this is what should be done,'" he said.

Stern did not address the economic outlook in detail and declined to comment on the likely direction of the Fed's monetary policy.

Still, partly as a knock-on effect of the credit market crisis, the United States is in for further job losses and soft consumer spending in the short run, which should help pull down inflation, he said.

The sharply higher budget deficits likely to be created by the Treasury's costly bank rescue plan will not necessarily lead to higher interest rates, Stern said.

Various factors, including the global savings glut and confidence in the Fed's commitment to keeping inflation low, can help to hold interest rates down, he said.

Much of Stern's speech was focused on the framework for a new supervisory regime to address the issue of systemic risk and were similar to those he made in Three Forks, Montana, in August.

(Editing by Dan Grebler)