Fed's Warsh: Credit markets healing but still wary

By Tamawa Kadoya

LOUDONVILLE, New York (Reuters) - Federal Reserve Board Governor Kevin Warsh said on Friday that credit markets were on the mend after August's turmoil, but some sectors remained sickly and the Fed was wary of fallout hurting economic growth.

"The functioning of several markets continues to be strained, a condition which I would expect to continue for a while," Warsh told the New York State Economics Association.

"Consequently, my colleagues and I on the FOMC (Federal Open Market Committee) will continue to assess the effects that these and other developments could have on the prospects for the economy. We will rely not only upon economic modeling, but also real-time, forward-looking indicators to help inform our policy judgments," he said.

Given a steady jobs report on Friday, markets are less sure if the Fed will cut rates again in October, although most still expect another rate cut by the end of the year.

The Fed cut interest rates by a half percentage point to 4.75 percent on September 18 to shield the economy from a global credit crunch that erupted in August after slumping U.S. housing triggered a wave of subprime mortgage defaults.

Warsh said it was premature to judge the ultimate effects of the rate cut on markets or the economy.

"Our dashboard of financial indicators, however, points to some encouraging signs, suggesting that financial conditions might be normalizing somewhat," he said.

In particular, he noted that credit-worthy borrowers were able to access markets to raise finance and that spreads in the interbank and commercial paper market had narrowed, while the "runoff" of funds out of commercial paper was slowing.