WASHINGTON (Thomson Financial) - The decision for a quarter-point interest rate cut was a "close call" for many members of the Federal Open Market Committee on October 31, but even with that "further easing," they still expected economic growth to slow over the next few quarters.
The FOMC debated the "relative merits" of a quarter-point reduction in the Fed funds target rate to 4.5 pct versus "awaiting additional information on prospects for economic activity and inflation" before making a decision, according to the meeting minutes released today.
"On balance, nearly all" of the FOMC members decided the current stance of monetary policy was "somewhat restrictive," partly because of tighter credit conditions.
Most of them also saw "substantial downside risks to the economic outlook" and thought a second rate cut--after the half-point in September -- "would provide valuable additional insurance against an unexpectedly severe weakening in economic activity."
The one exception to that "nearly all" was Kansas City Federal Reserve Bank President Thomas Hoenig who voted for no change. He believed "inflation risks appeared elevated," felt that the Fed funds rate, then at 4.75 pct, was "close to neutral." The minutes said Hoenig thought monetary policy should be "slightly firm to better hold inflation in check."
Despite the FOMC's description of the risks to growth and inflation as balanced in its post-meeting statement, the minutes show somewhat less concern about inflation than about growth.
Core inflation reports had been "generally favorable," and the FOMC "agreed that the recent moderation in core inflation would likely be sustained." Going forward, they thought inflation would "edge down over the next few years."
Nonetheless, the minutes said, "recent increases in the prices of energy and other commodities, along with the significant decline in the dollar," were clearly factors that could "exert upward pressure on prices of some core goods and services."
Several of the FOMC participants saw "some relapse in financial conditions" leading up to the meeting. The general view was that markets were "fragile" and the FOMC was "concerned that an adverse shock -- such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses -- could further dent investor confidence and significantly increase the downside risks to the economy."
Hoenig pointed out, according to the minutes, that the Fed could act as needed if new liquidity problems appeared in the financial markets, and "preferred to wait, watch and be ready to act depending on how events developed."
Though there was "scant evidence" of spillover effects from housing into the rest of the economy, Fed members were also worried about "notable declines" in consumer confidence.
They worried that falling home prices, rising gasoline prices and tighter credit could further sap consumer confidence and cause a bigger pullback in spending.
The FOMC saw the chance of "significant further weakening in housing activity and home prices." Tighter credit and a rise in foreclosures could intensify the downward pressure on house prices.
The FOMC debated the "relative merits" of a quarter-point reduction in the Fed funds target rate to 4.5 pct versus "awaiting additional information on prospects for economic activity and inflation" before making a decision, according to the meeting minutes released today.
"On balance, nearly all" of the FOMC members decided the current stance of monetary policy was "somewhat restrictive," partly because of tighter credit conditions.
Most of them also saw "substantial downside risks to the economic outlook" and thought a second rate cut--after the half-point in September -- "would provide valuable additional insurance against an unexpectedly severe weakening in economic activity."
The one exception to that "nearly all" was Kansas City Federal Reserve Bank President Thomas Hoenig who voted for no change. He believed "inflation risks appeared elevated," felt that the Fed funds rate, then at 4.75 pct, was "close to neutral." The minutes said Hoenig thought monetary policy should be "slightly firm to better hold inflation in check."
Despite the FOMC's description of the risks to growth and inflation as balanced in its post-meeting statement, the minutes show somewhat less concern about inflation than about growth.
Core inflation reports had been "generally favorable," and the FOMC "agreed that the recent moderation in core inflation would likely be sustained." Going forward, they thought inflation would "edge down over the next few years."
Nonetheless, the minutes said, "recent increases in the prices of energy and other commodities, along with the significant decline in the dollar," were clearly factors that could "exert upward pressure on prices of some core goods and services."
Several of the FOMC participants saw "some relapse in financial conditions" leading up to the meeting. The general view was that markets were "fragile" and the FOMC was "concerned that an adverse shock -- such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses -- could further dent investor confidence and significantly increase the downside risks to the economy."
Hoenig pointed out, according to the minutes, that the Fed could act as needed if new liquidity problems appeared in the financial markets, and "preferred to wait, watch and be ready to act depending on how events developed."
Though there was "scant evidence" of spillover effects from housing into the rest of the economy, Fed members were also worried about "notable declines" in consumer confidence.
They worried that falling home prices, rising gasoline prices and tighter credit could further sap consumer confidence and cause a bigger pullback in spending.
The FOMC saw the chance of "significant further weakening in housing activity and home prices." Tighter credit and a rise in foreclosures could intensify the downward pressure on house prices.
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