Fed cut was a ‘close call’ in October

The Federal Reserve was unsure last month whether lower borrowing costs were needed to cushion the economy from a housing slump and credit woes but cut interest rates as a form of insurance.

“Many members noted that this policy decision was a close call,” minutes of the Fed’s Oct. 30-31 meeting released Tuesday said. The minutes were in keeping with recent comments from Fed officials suggesting rates were low enough to see the economy through a slow-growth period but failed to dissuade financial markets from betting that rates would drop further.

In addition to the minutes, the U.S. central bank took a step toward pulling back its veil of secrecy and issued updated forecasts that showed officials expect a much more sluggish economy next year than they had before financial turmoil hit in the summer.

The Fed projected economic growth to slow in 2008 to 1.8% to 2.5%, sharply down from the 2.5% to 2.75% forecast in June, before picking up again in 2009.

The forecast, the first of what will be regular quarterly projections from the central bank, was broadly in line with views of private-sector economists. In the past, Fed officials provided less-detailed forecasts and only twice a year.

Policymakers lowered their forecast because of the tightened terms and reduced availability of nonstandard mortgages, weakness in housing and rising oil prices, a summary of the forecast said.

The U.S. central bank trimmed benchmark rates by a quarter of a point to 4.5% in October, building on a half-point cut made in September.

Policymakers opted to reduce borrowing costs last month because tighter credit had made the stance of monetary policy somewhat restrictive, the minutes said.

Analysts played down the October deliberations by the rate-setting Federal Open Market Committee, saying a further deterioration in financial conditions since then may well put the central bank on course for more rate cuts.

“There is no way that the FOMC was confident of anything, so that just because they thought they might be done on Oct. 31 does not mean anything today or certainly on Dec. 11 or Jan. 30,” said Stephen Stanley of RBS Greenwich Capital, referring to the next two Fed policy meetings.

U.S. short-term interest rate futures showed an 84% perceived chance the Fed would reduce rates in December, up from as low as 70% earlier in the day.

The minutes showed Fed officials remained worried in October that financial markets were still showing stress from concerns about bad credit.

The Fed was more sanguine on inflation, expressing confidence that a recent moderation in core inflation, which strips out energy and food prices, could be sustained.

At the same time, policymakers cited a number of factors, including soaring oil prices and a weakening dollar, as having the potential to put upward pressure on inflation in the near term.

Moreover, Fed officials worried that persistently higher readings for overall inflation could unhinge well-anchored inflation expectations, potentially unleashing a self-feeding inflationary cycle.