Fed Was United in Cutting Interest Rates Last Month


All members of the Federal Reserve's policy-setting committee agreed a half-percentage point federal funds interest rate cut was necessary to shield the economy from credit disruptions and an intensifying housing slowdown, minutes of their Sept. 18 meeting showed.

"In order to help 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," the minutes said.

Members thought sharply lowering benchmark overnight borrowing costs could help offset the effect of tighter financial economic conditions on the economy.

Without such a move, policy-makers were afraid that tightening credit conditions and the deepening housing slump that had been triggered by a spike in mortgage foreclosures
would lead to "significant weakness" in business activity and hiring.

Also, the damage to financial markets as credit dried up could get worse and further chill economic activity, members of the U.S. central bank's interest-rate setting Federal Open
Market Committee thought.

Surprising Markets

At that meeting, the Fed slashed its target for benchmark overnight borrowing costs to 4.75 percent, surprising many in financial markets who had been expecting a quarter-percentage
point rate cut to 5 percent.

The minutes show that at the time, Fed policy-makers saw the economic situation fraught with a high degree of uncertainty as they considered whether the credit crunch would substantially slow economic growth or not.

They believed risks were tilted toward a slowdown in economic activity, but also noted that the economy had previously weathered periods of financial disruption with only limited broadly adverse effects.

At the same time, the Fed believed that tighter credit would restrain economic growth in the period ahead, and worried that any further disruptions in financial markets could magnify
risks to the economy.

The Fed discussed "additional policy options" to address strains in money markets at the meeting, but no decisions were taken at the time, the minutes said.

'Fragile' Markets

Poole: Economy Fragile

Meanwhile, Federal Reserve Bank of St Louis President William Poole said the September jobs report showed that the outlook for the U.S. economy was not darkening as some had feared, but conditions remain fragile.

"Financial markets appear to be stabilizing, but they have not returned to normal and are still fragile,'' Poole, a voting member of the Fed's interest-rate setting committee this year,
told the Industrial Asset Management Council in prepared remarks.

"Most forecasters have reduced their expectations for GDP (gross domestic product) growth and believe that downside risks have risen. However, the employment report for September, the latest available at this time, does not suggest that the downside risk is occurring,'' he said.

Poole was referring to the stronger than expected monthly employment report that showed 110,000 jobs were created in September, with August and July's results also revised up.

"The substantial upward revisions to data released in the August report remind us that it is a mistake to place too much weight on any one report,'' he said.

No Idea on Weak Dollar

Poole also said on Tuesday that the depreciation of the U.S. dollar is something that is not explicable.

"The depreciation of the dollar is something that we cannot explain," Poole told the Industrial Asset Management Council. "We cannot explain the fluctuation of currencies after they have occurred."