Atlanta Fed Chief Expects Credit Crunch to Hang On

Robert Forrestal, president of the Federal Reserve Bank of Atlanta, says the credit crunch persists even though the economy is recovering.

"I don't think we're out of the credit crunch," Mr. Forrestal said in a telephone interview. "The recovery will help, but I don't believe that we'll have a return to the kinds of lending we had over the last several years."

"I think that's positive, though," and will lead to reforms in the nation's banking system, he said.

Mergers Seen as Helpful

Mr. Forrestal said bank mergers might help alleviate the credit crunch. But they would improve the credit situation only in the long-term.

"There are a number of problems in the U.S. banking system and a major problem is that there's too much capacity," he said. He added that he thought mergers likely to spread.

Mr. Forrestal declined to say whether there are any other banks in his district - in addition to NCNB Corp. and C&S/Sovran Corp., which announced a merger accord last week - that would be likely candidates to combine.

A voting member of the Fed's Federal Open Market Committee, the Atlanta district president sees inflation moderating in the long term. But his forecast for consumer price inflation at year's end is 4.5%, which does not represent a significant drop from the 4.6% recorded for the year to June. "The core rate will probably be a little bit higher than that," he said.

In congressional testimony two weeks ago, Fed Chairman Alan Greenspan said the central bank projected a 3.25% to 3.75% inflation rate as of the end of the year.

Long-Term Rates Are Problem

"Although the core inflation number now is not something I take a great deal of comfort with, the Fed is committed to fighting inflation very strongly," Mr. Forrestal said.

The Fed is keen to strengthen its inflation-fighting credibility to bring long-term rates down, Mr. Forrestal said. Despite several cuts in short-term rates in the past year, long-term rates have remained stubbornly high. "That just shows there's nothing that [the Fed] can do about long-term rates."

"I don't thing the market is yet convinced we've seen the end of the inflation problem," he added. The market "is looking for inflation to move down further."

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