WASHINGTON (Dow Jones)--The Federal Reserve cut interest rates in November in response to disappointing economic data and concerns that past fiscal and monetary stimulus was wearing off, the Fed said Thursday in the minutes of its Nov. 6 policy meeting.
The Federal Open Market Committee decided on a 50-basis-point rate cut with little disagreement, according to the minutes. But there was some disagreement about how to craft the Fed's statement of the ongoing risks facing the economy.
Some FOMC members probably would have preferred to leave the balance of risks tilted toward economic weakness, as it was in the Fed's Sept. 24 policy statement. But many other FOMC members wanted to shift to a balanced risk assessment that gave equal weight to inflation pressures and further weakness.
"In the view of many members, retaining the assessment that the risks were tilted toward weakness would raise the odds of an overreaction in the financial markets, which might well misread the committee's decision as a sign that the members were more concerned about the potential for greater economic weakness than was in fact the case and that therefore the Committee currently saw a likely need for further easing later," the minutes said.
All of the FOMC members said they could accept a balanced risk assessment, in light of the planned rate cut. Members viewed the rate cut as a way to help the economy through a "soft spot" that was longer than expected.
"Members commented that the potential costs of a policy easing action that later proved not to have been needed were quite limited in that there was little risk that such a move would foster inflationary pressures under likely economic conditions over the next several quarters," the minutes said.
If the rate cut proved to be larger than necessary, members said the Fed would not have trouble unwinding its effects down the road. But if the Fed moved less aggressively, FOMC members worried it might be harder to make up lost ground.
"A failure to take an action that was needed because of a faltering economic performance would increase the odds of a cumulatively weakening economy and possibly even attendant deflation," the minutes said. "An effort to offset such a development, should it appear to be materializing, would present difficult policy implementation problems."
FOMC members said they expected "persisting slack in resource use" to lead to further slowing in inflation. Some members brought up the possibility of deflation, although they viewed its chances as "remote."
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12-12-02 1400ET |
