Fed's Kohn hints at December rate cut

By Tamawa Kadoya

NEW YORK (Reuters) - The Federal Reserve's second in command on Wednesday signaled a readiness to cut interest rates again, acknowledging that financial market turmoil could slow the U.S. economy and 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 policy-making -- nimble is the adjective I used a few weeks ago."

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

Kohn sent Wall Street stocks soaring, with the Dow Jones industrial average .DJI advancing over 300 points as investors read his remarks as a strong hint of another quarter point cut at the next Fed rate-setting meeting on December 11.

Kohn's sober assessment also coincided with a separate Fed report underlining the drag being exerted on the wider U.S. economy by the weak housing sector.

The Beige Book, based on reports from the 12 regional Federal Reserve branches, noted that seven Fed districts had reported a slower pace of growth, while conditions in the remaining five districts were modest or mixed.

"The national economy continued to expand during the survey period of October through mid-November but at a reduced pace," the Fed said.

Kohn explicitly nodded to the deterioration since the Fed last met to discuss policy, on October 30-31. At that meeting it lowered rates by a quarter point to 4.5 percent, but said the risks to growth and inflation were roughly balanced.