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A series of interest rate cuts and liquidity injections should help financial markets stabilize, but don't expect credit financing to stay the same, Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech Thursday.
Adjustments in credit markets have been "painful but necessary," Lockhart said. "So, as we move out of the current turmoil, I see the U.S. markets headed toward a 'new normal,' not a return to normal."
A crisis that began in the U.S. subprime mortgage market froze lending conditions and pummeled the housing market, leading some economists to predict a recession this year.
The Federal Reserve has responded by slashing its benchmark interest rate by a cumulative 225 basis points since mid September of 2007, including 125 basis points in a period of nine days.
"The liquidity injections and easing of monetary policy should help housing and financial markets stabilize and avoid an 'adverse feedback loop' in which a continuing decline in housing prices fuels financial market volatility with spillover to the broader economy," said Lockhart, who is not a member of the Fed's policy-making body in 2008 but will be next year.
He added that credit markets will not return to the way they functioned before the current turmoil. Banks will continue to be a cornerstone of the financial system, but will be more transparent in what they hold in their own portfolios.
Lockhart also expects investors will demand less complicated financing structures and will not rely so much on the rating agencies in determining the credit health of an investment.
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