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Credit, housing woes pushed Fed to slash rates

From the Associated Press

washington -- Worried that a jarring credit crunch would stifle the economy, Federal Reserve policymakers at their September meeting felt compelled to act aggressively in lowering a key interest rate for the first time in more than four years.

Fed policymakers unanimously agreed to slash interest rates by one-half of a percentage point to 4.75%, calling it “the most prudent course of action,” according to minutes of the Sept. 18 meeting released Tuesday.

The minutes underscored just how concerned Fed Chairman Ben S. Bernanke and his central bank colleagues were that the credit crisis and the housing slump could undermine the country’s economic health. The minutes offered fresh insights into the September meeting, where Bernanke was faced with one of his most important decisions since taking office in February of last year.

“Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside,” according to the minutes.

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Some Fed participants expressed concern that a weaker economy could worsen the credit crunch, which, in turn, could “reinforce the economic slowdown.” At the same time, participants pointed out that in previous episodes of financial market disruptions, the economy showed some resilience when the country was suffering through a period of financial turbulence.

“Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead,” the minutes said.

Lowering its main interest rate, called the federal funds rate, “was appropriate to help offset the effects of tighter financial conditions on the economic outlook,” the minutes stated. The funds rate, the interest that banks charge one another on overnight loans, affects a wide range of interest rates charged to millions of consumers and businesses. It is the Fed’s main tool for influencing national economic activity.

If the Fed did not lower rates, Fed policymakers “saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness” in the economy as well as in national employment conditions, according to the minutes.

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Fed policymakers also believed that the rate cut “should not interfere” with lenders and other investors making the painful adjustments that they need to get their financial houses in order, the minutes said.

With economic growth likely to run at a sub-par pace for a while and incoming inflation data on the “favorable side,” the lowering of rates “seemed unlikely to affect adversely the outlook for inflation,” the minutes said.

The credit crunch was likely to deepen the housing slump, raised the possibility of damping consumer spending and could weigh on business investment, the minutes said. Spending by consumers and businesses is crucial to keeping the economic expansion going.

Policymakers didn’t think that the job market had deteriorated as much as a government report at the time suggested. Nonetheless, they believed that “some further slowing of employment growth was likely.”

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The minutes also said that Fed policymakers discussed “additional policy options to address strains in money markets.” No decisions were made and no details were provided.


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