Fed saw 'exceptionally weak' housing ahead of rate cut
Thursday, 11 October 2007
WASHINGTON, Oct 10 (AFP): The Federal Reserve's half-point rate cut last month came amid evidence of an "exceptionally weak" housing sector and risks of wider economic problems into 2008, minutes released yesterday showed.
The minutes from the September 18 Federal Open Market Committee meeting suggested policymakers were worried about a spillover from the housing and credit woes to the broader economy.
At the meeting, FOMC members voted unanimously to cut the key federal funds interest rate by half a percentage point to 4.75 per cent.
The move at the time came as a surprise to many in financial markets who anticipated a more modest cut of 25 basis points and that the Fed would not want to show a sense of panic about the economy.
The minutes indicated that the Fed staff in preparation for the meeting projected "moderate" economic growth in the third quarter but had trimmed their forecast for the fourth quarter and through 2008 as a result of housing and credit woes.
But policymakers said that because of the roiling of financial markets amid worries about a credit squeeze, the outlook was questionable.
"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterised by particularly high uncertainty, with risks to growth skewed to the downside," the minutes said.
Without a rate cut, the members feared "that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment," according to the minutes.
"In order to forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action."
In an apparent reference to concerns that the rate cut would be seen as bailing out investors who made risky bets, the minutes indicated FOMC members believed the move "should not interfere with an adjustment to more realistic pricing of risk.
The minutes from the September 18 Federal Open Market Committee meeting suggested policymakers were worried about a spillover from the housing and credit woes to the broader economy.
At the meeting, FOMC members voted unanimously to cut the key federal funds interest rate by half a percentage point to 4.75 per cent.
The move at the time came as a surprise to many in financial markets who anticipated a more modest cut of 25 basis points and that the Fed would not want to show a sense of panic about the economy.
The minutes indicated that the Fed staff in preparation for the meeting projected "moderate" economic growth in the third quarter but had trimmed their forecast for the fourth quarter and through 2008 as a result of housing and credit woes.
But policymakers said that because of the roiling of financial markets amid worries about a credit squeeze, the outlook was questionable.
"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterised by particularly high uncertainty, with risks to growth skewed to the downside," the minutes said.
Without a rate cut, the members feared "that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment," according to the minutes.
"In order to forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action."
In an apparent reference to concerns that the rate cut would be seen as bailing out investors who made risky bets, the minutes indicated FOMC members believed the move "should not interfere with an adjustment to more realistic pricing of risk.