Bill Poole, president of the St. Louis Federal Reserve Bank, says financial markets seem to healing from subprime-related problems. “Recent weeks show clear progress,” he said in a speech today at Marquette University.

Poole says the Federal Reserve “needs to be careful to do what is necessary, but not more” during periods of market chaos. And he noted that when markets return to normal, the Fed   “can also return to its normal focus on the long-run needs of the economy.” What might that mean in the present situation? Poole said:

 In current circumstances, it could be that the downdraft from the housing industry will spread to other sectors, which might require that recent rate cuts not be reversed or even that additional rate cuts would be in order. Conversely, as markets heal the policy situation may return to one resembling that of a few months ago in June, before subprime problems began to have significant market impact.