Worries drove Fed to cut rates
WASHINGTON (AP) - January 2, 2008 All those problems also greatly increased uncertainty about the
economy's outlook, prompting Fed policymakers to keep all their
option open about their next move, the minutes of the closed door
meeting on Dec. 11 revealed.
"Although members agreed that the stance of policy should be
eased, they also recognized that the situation was quite fluid and
the economic outlook unusually uncertain," the minutes said.
Fed Chairman Ben Bernanke and all but one of his colleagues
agreed to trim the Fed key rate by one-quarter percentage point to
4.25 percent, a two-year low. The central bank ordered its key rate
to be lowered three times last year; the December reduction was
most recent one.
The decision to cut rates essentially marked a reversal for the
central bank, which had hinted at its previous meeting in October
that the Fed's two rate cuts probably would be sufficient to help
the economy survive the housing and credit stresses. But the
economy's problems intensified after that meeting, forcing the Fed
to change its stance.
"Members judged that the softening in the outlook for economic
growth warranted an easing of the stance of policy at this
meeting," the minutes said. "In view of the further tightening of
credit and deterioration of financial market conditions, the stance
of monetary policy now appeared to be somewhat restrictive,"
according to the minutes.
The 9-1 decision for a quarter-point reduction in December was
opposed by Eric Rosengren, president of the Federal Reserve Bank of
Boston. He preferred a bolder, half-percentage point cut.
In Rosengren's view, the worsening housing slump, high energy
prices and more cautious spending by individuals and businesses
raised the risks of continued economic weakness, the minutes
stated. "In light of that possibility, a more decisive policy
response was called for to minimize that risk," the minutes said,
explaining Rosengren's concerns.
However, the other Fed policymakers also had concerns that
rising energy prices could spread inflation through the economy.
That concern figured into the Fed's decision to cut rates by a
modest one-quarter point cut in December, the minutes suggested.
"Inflation pressures and risks remained," according to the
minutes.
To bolster the economy, many economists predict the Fed will
slice rates yet again at next meeting, on Jan. 29-30, the first
regularly scheduled gathering of 2008. The economy is believed to
have slowed sharply in the October-to-December, probably to a pace
of just 1.5 percent or less, according to analysts' projections.
Economic growth in the first three months of this year also is
expected to be weak.
The big worry among economists is that individuals will clamp
down on spending and businesses will become reluctant to hire
workers, throwing the economy into a tailspin. The odds of a
recession have grown, with some economists putting it just under 50
percent.
At the December meeting, Fed policymakers suggested that all the
economic uncertainty made it more difficult to give a strong signal
about their next move.
"The committee agreed on the need to remain exceptionally alert
to economic and financial developments and their effects on the
outlook, and members would be prepared to adjust the stance of
monetary policy if prospects for economic grwoth or inflation were
to worsen," the minutes said.
If economic conditions were to improve more rapidly than
expected, "a reversal of some of the rate cuts might be
appropriate," according to the record of the meeting.
One day after the Fed's Dec. 11 meeting, the central bank
announced a new plan to try to provide relief to the global credit
crisis.
The Fed said it would begin providing billions of dollars of
loans to banks through a new auction facility. The rationale was
that by giving cash-strapped banks a new avenue to get their hands
on funds, they would be able to keep making loans to people and
businesses. So far, $40 billion in loans have been made to banks.
Additional auctions are planned for banks to obtain loans.
Some Fed policymakers believed this new auction facility would
be a "potentially useful tool" to help ease credit problems,
according to the minutes.