Fed Saw a Period of 'High Uncertainty' Before Rate Cut
Minutes show concern over housing and credit market turmoil.
Oct. 9, 2007 — -- A look behind the curtain at the August Federal Reserve meeting out today offered some fresh insights into what the nation's top bankers were thinking about the state of the overall economy when they cut interest rates.
Fed Chairman Ben Bernanke and company agreed at the September meeting to cut the Federal Funds rate target by a half-percentage point in response to the turmoil in the credit markets and a continued drop in sales activity in the residential real estate market. It was the first rate cut for the Fed in four years.
"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with risks to growth skewed to the downside," read the meeting notes. The members of the Fed's Open Market Committee voted unanimously to move rates lower.
The central bankers noted in their discussion that the economy was facing what could be a snowball effect, where slowing growth would further reduce the public market for credit, pushing the economy even further into the doldrums.
Even more worrisome was the possibility that the market's slide in the days preceding the meeting could deepen the slump in the housing market.
"[Recent] developments had the potential to deepen further and prolong the downturn in the housing market, as subprime mortgages remained essentially unavailable, little activity was evident in the markets for other nonprime mortgages, and prime jumbo mortgage borrowers faced higher rates and tighter lending standards," said the minutes.
The governors noted during the meeting that they were increasingly confident that inflation seemed under control, giving them the wiggle room they needed to reduce rates to spur business activity.
"Without such policy action [the lower rates], members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment," said the minutes.
While the reasons for the rate cut are well documented in today's release, any hint of what the central bank might do at future meetings is missing.
Wall Street rallied after the minutes were released, indicating that most traders see the Fed being willing to move rates even lower should trouble continue in the housing and credit markets. The Dow Jones industrial average jumped more than 100 points in the hours after the release.
A time of high uncertainty, indeed.
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