Kohn says Fed needs to be "nimble" amid turmoil

By Tamawa Kadoya

NEW YORK (Reuters) - The Federal Reserve's No. 2 official on Wednesday signaled a willingness to cut interest rates further, saying renewed financial market turmoil could slow the U.S. economy more abruptly than earlier thought.

"Uncertainties about the economic outlook are unusually high right now," Fed Vice Chairman Donald Kohn told the Council on Foreign Relations. "These uncertainties require flexible and pragmatic policy-making -- nimble is the adjective I used a few weeks ago."

Credit markets, which had settled some after extreme jitters set in August, began to deteriorate anew in recent weeks as a number of major U.S. banks announced they will write-down billions of dollars worth of assets due to exposure to souring mortgages and other debt.

"The increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and October," Kohn said. "Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses."

Kohn's remarks stood in sharp contrast to recent comments by Philadelphia Federal Reserve Bank President Charles Plosser, Chicago Fed President Charles Evans and Fed Governor Randall Kroszner, who had suggested as recently as Tuesday that the two rate cuts made since mid-September would be enough to buffer the economy from the housing slump and related market turmoil.

However, as vice chairman, Kohn's acknowledgment that further easing by the Fed's policy-setting Federal Open Market Committee may be necessary carries outsize weight, and the comments helped cheer stock investors.

"It sounded nothing like anything we've heard since the last meeting from other FOMC members," said Laurence Meyer, a former Fed governor who introduced Kohn at the event. "It's not a surprise because the only FOMC members that can change the message are the vice chairman and the chairman."

The Fed cut benchmark overnight lending rates by a half-percentage point on September 18 and by a further quarter-point on October 31, bringing them to 4.5 percent. It next meets on December 11.