Fed fears economy could worsen

Published: Thursday, January 3, 2008 at 6:01 a.m.
Last Modified: Thursday, January 3, 2008 at 12:00 a.m.

WASHINGTON - Federal Reserve policymakers worried at their December meeting about the potential for a vicious cycle to develop in which credit problems could worsen. That could hurt economic growth and force the Fed to act more aggressively in cutting rates, according to meeting minutes made public Wednesday.

"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit," the minutes said. "Such an adverse development could require substantial further easing" of rates, the minutes revealed.

Problems in the housing, credit and financial markets drove the Fed to do an about-face on Dec. 11 and slice its key interest rate yet again in the hope it would bolster an economy that was losing speed.

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 lowered three times last year; the December reduction was the most recent one.

The decision to cut rates essentially marked a reversal for the central bank, which had hinted at its October meeting that the Fed's two rate cuts probably would be enough 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," the minutes said.

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 risk of continued economic weakness, the minutes said. "In light of that possibility, a more decisive policy response was called for to minimize that risk,'' the minutes said.

Wall Street, disappointed by the quarter-point cut, took a nosedive Dec. 11; The Dow Jones plunged more than 290 points.

Fed policymakers were concerned 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 stated.

To bolster the economy, Many analysts predict the Fed will slice rates yet again at its next meeting, on Jan. 29-30, the first regularly scheduled gathering of 2008.

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