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Fed notes show members backed big interest-rate cut ,
Published in Saudi Press Agency on 10 - 10 - 2007

All members of the U.S. Federal Reserve (Fed) policy-setting committee agreed that a half-percentage point interest-rate cut was necessary to shield the economy from an intensifying housing slowdown and credit disruptions, notes of their September 18 meeting released Tuesday 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 [half-percentage point] at this meeting was the most prudent course of action,” the notes said.
Central-bank members thought that sharply lowering the key interest rate could help offset the effect of tighter financial conditions on the U.S. economy. Without such a move, policymakers 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 tightened could become worse and hurt economic activity, members of the Fed's interest-rate-setting Federal Open Market Committee (FOMC) thought.
At last month's FOMC meeting, the Fed cut its target for overnight borrowing costs to 4.75 percent, surprising many in financial markets who had been expecting a smaller quarter-percentage point rate cut to 5 percent.
The Fed notes showed that at the time, central-bank policymakers saw a high degree of uncertainty in the economic situation as they considered whether the credit crisis 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 handled periods of financial disruption with only limited effects.
At the same time, the central bank 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 September meeting, but no decisions were taken at the time, the notes showed.


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