-- Fed Saw Big Rate Cut Shortening Soft Spot --
By Jonathan Nicholson
WASHINGTON (Reuters) - Members of the U.S. Federal
Reserve's monetary policy-making panel decided on their jumbo
half-percentage point rate cut in November as the best way to
cut short a "soft spot" in economic growth, according to
minutes of the meeting released on Thursday.
"A relatively aggressive easing action could help to ensure
that the current soft spot in the economy would prove to be
temporary and enhance the odds of a robust rebound in economic
activity next year," according to minutes of the Nov. 6 meeting
of the Federal Open Market Committee.
Some members also cited restrictive financial conditions,
especially in bank lending, as another justification for the
move.
"The members agreed that monetary policy could do little to
improve the performance of the economy in the near-term but
some emphasized that a 50 basis point easing likely would feed
through to some degree to market interest rates, with favorable
implications for spending next year," the minutes said.
And with inflation subdued, the panel believed that the
risks of easing sharply were much less than the risks in not
taking action if the economy continued to struggle.
"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.
The FOMC ultimately voted 12-0 to cut rates by a
larger-than-expected amount at the meeting and said the risks
to the economy were balanced between inflation and weakness.
There was less unanimity, however, on what is known as the
"balance of risks" statement. Coming into the meeting, the
panel had said the economic risks were tilted toward 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 financial markets," and lead them to expect
more cuts, the minutes said. But it also noted "some members"
were less worried about that possibility.
While the FOMC members said fiscal policy has eased worries
that a dwindling supply of U.S. Treasury debt could constrain
Fed monetary operations, they also directed the staff to
continue studying the use of mortgage-backed securities issued
by the Government National Mortgage Association, "Ginnie Maes,"
for possible use "at some point in the future."
In 2001, when large federal budget surpluses were forecast
and before the economy went into recession, the Fed mulled how
it might influence interest rates in the absence of U.S.
Treasury securities, should the national debt be eventually
repaid. Those worries have largely disappeared, though as the
weak economy, the war on terrorism and tax cuts have pushed the
government back into running annual deficits.
"Fiscal policy developments made it clear that earlier
concerns about a contracting supply of securities in the U.S.
government securities market would not likely impose
constraints on the (Fed) System's open market operations in the
near term," the minutes said.
The panel also said outright purchases of Ginnie Maes would
present "a number of difficulties" and require extensive
preparation. The FOMC also told Fed staff to discontinue its
study of the possible use of foreign sovereign debt for similar
purposes.
At the FOMC's most recent meeting on Tuesday, the panel
voted unanimously to leave rates steady and said there were
signs the economy was moving out of its slump.
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12-Dec-2002 20:31:09 GMT
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