By Craig Torres and Deborah Finestone Video: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/v8Apj0U8Trqc.asf
Aug. 21 (Bloomberg) -- The Federal Reserve may be able to avoid an emergency reduction in the benchmark interest rate as some of its steps to increase liquidity show signs of success.
``The flight to safety may be diminishing a bit,'' said Holly Liss, a bond saleswoman in Chicago at Citigroup Global Markets Inc. ``We're seeing more calming of the market as T-bill rates come back to normal.''
U.S. Treasury bill yields rose for the first time in six trading days as demand for the safest government debt declined. Fed officials still don't expect to know for days whether their Aug. 17 cut in the discount rate will improve trading in the $1.1 trillion market for asset-backed commercial paper.
Richmond Fed President Jeffrey Lacker, in the first speech by a policy maker since the Fed cut the cost of direct loans from the central bank to 5.75 percent, said decisions need to be guided by the outlook for prices and growth. Market gyrations shouldn't be the sole consideration, he emphasized.
``Financial market volatility, in and of itself, doesn't require a change in the target federal funds rate,'' Lacker said at a luncheon of the Risk Management Association of Charlotte. ``Policy needs to be guided by the outlook for real spending and inflation.''
Lacker added that ``the jury is still out'' on whether the Fed has done enough to relieve overall liquidity
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