The Federal Reserve will succeed eventually in getting paralyzed credit markets moving, but for now they are dragging on the U.S. economy, Boston Fed President Eric Rosengren said on Thursday.

Rosengren said in a speech for delivery at the University of Wisconsin that the United States is in for continued weak growth over the short run given the “liquidity lock” now apparent in credit markets.

“The economy is likely to grow well below its potential for the rest of this year,” with consumer spending weak, exports to slip along with slower world growth, and “little evidence that the housing market has ‘touched bottom,’” he said.

Many companies also appear to be holding back on spending until the economic outlook becomes clearer, Rosengren said.

Rosengren is not a voter on the policy-setting Federal Open Market Committee in 2008.

He did not discuss the monetary policy outlook or the Fed’s emergency interest rate cut on Wednesday, which was coordinated with other major central banks.

Instead, Rosengren focused on the extent to which even short-term lending has frozen up over the past few weeks, and its spillover to the broader U.S. economy.

Even the most credit-worthy firms are finding it hard to obtain financing for very short maturities of just a few days, he said, calling it a “liquidity lock.”

That, in turn, “makes it more difficult to finance short-term receivables, ranging from home equity loans to student loans to auto and credit card loans,” Rosengren warned.

Rosengren said it is imperative for Fed policy-makers to understand the interplay of the credit market’s problems with the broader economy in order to frame its response.

“Only in understanding the situation and its severity can all of us, and especially policy-makers, develop effective responses in the near term and long term,” he said.

Source: http://www.afxnews.com

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