Kohn says Fed needs to be "nimble" amid turmoil

NEW YORK (Reuters) - Federal Reserve Vice Chairman Donald Kohn said on Wednesday he factored some tightening of credit from the financial turmoil into his policy decisions, but recent turbulence may restrict credit more than previously thought.

"The increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and October," he said in a speech to the Council on Foreign Relations in New York.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

Kohn's comments come after large U.S. banks, in recent weeks, announced billions of dollars in write-downs due to losses from mortgages and other debt.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

Kohn said higher borrowing costs could be expected to discourage spending, and would normally call for offsetting monetary policy action. He said he had taken some restraint on demand into account when he weighed interest rate cuts at the Fed's September and October meetings.

The U.S. central bank reduced interest rates by a cumulative three-quarters of a percentage point at those two meetings to buffer the economy from the shocks of a rise in mortgage defaults and credit market disruptions. The policy-setting panel meets again December 11.

(Reporting by Tamawa Kadoya, writing by Mark Felsenthal, Editing by Chizu Nomiyama)