Kaufman sees credit strains abating

NEW YORK (Reuters) - The intense strains in short-term lending markets should abate slightly in January as year-end funding pressures pass, but global banks likely face further write-downs, prominent Wall Street economist Henry Kaufman said on Wednesday.

"Remember that December is a window-dressing month. It will be interesting to see what happens once we get over December 31," Kaufman said at the Reuters Investment Summit in New York.

Even so, the broad swathe of the global credit crisis will roll onward, with the wave of write-downs by global financial institutions likely to continue into the second half of 2009, he said.

Recession in Europe is likely to create more banking losses there, Kaufman said. "We're not through the credit crisis by any means."

U.S. Treasury bill rates, which have traded this week down to zero percent, and the benchmark 10-year Treasury note yield of about 2.7 percent , shows that investors are prepared to hold nothing but the safest instruments, he said.

Kaufman became known for correctly forecasting higher inflation and interest rates when he was chief economist with Salomon Brothers in the 1970s and 1980s. During that time he acquired the moniker "Doctor Doom" among financial market watchers.

The current U.S. economic recession, already a year old, will be the worst since World War Two, but the risks of widespread deflation are low, Kaufman said.

"I would start to worry about that if I saw a real reduction in prices of services," such as health care and education, he said. "Those things have been rather sticky."

On the flip side, the billions of dollars of liquidity pumped into markets by the Federal Reserve could stoke inflation "down the road," said Kaufman.

"A little bit of inflation now, if we could bring it about, would be a helpful development" by spurring inventory building and more spending on plant and development, he said.

Kaufman said that demand for private sector debt may ultimately compete with demand for government Treasuries, but for now, there is little demand for corporate bonds.

He forecast that the nearly $5 trillion U.S. government debt market will swell by another $1.5 trillion over the next year or so.

Kaufman said the Federal Reserve's policy-setting Federal Open Market Committee would most likely lower the fed funds rate and the discount rate at its meeting next week, as the market expects.

In the months ahead the Fed will push further ahead with quantitative measures, including the possibility of buying high-grade corporate debt, to support the economy, he said.

Earlier on Wednesday, The Wall Street Journal reported that the Fed was considering issuing its own debt for the first time, citing people familiar with the matter.

But Kaufman said he thought the Fed is "unlikely" to try that approach, which would probably need approval from Congress.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by John Parry and Ros Krasny; Editing by Leslie Adler)