Fed Takes Wait-and-See Approach
Wednesday, October 10, 2007
Federal Reserve policymakers left their Sept. 18 meeting without any specific plan for further interest-rate cuts because they were unsure how markets and economic growth would respond, minutes of the meeting show.
"Further actions would depend on how economic prospects were affected by evolving market developments and by other factors," according to the records, released yesterday. Any statement on the balance of risks to the economy "could give the mistaken impression that the committee was more certain about the economic outlook than was in fact the case."
The report reinforces comments by Fed officials including Vice Chairman Donald L. Kohn this month, which show the central bank hasn't committed to a series of rate reductions. Kohn said on Friday that policymakers must be "nimble" in setting policy because of risks to both growth and inflation.
Fed officials "all" concluded it was best to lower their benchmark rate by half a point to 4.75 percent, double the reduction that most economists forecast, the minutes show. The release includes summaries of conference calls by Fed officials on Aug. 10 and Aug. 16. Policymakers discussed changing the lesser-used discount rate on Aug. 10 before they reduced it half a point on Aug. 17, the minutes said.
Bonds fell after the minutes were published. The yield on the benchmark 10-year note rose 3 basis points (0.03 percentage points), to 4.66 percent at 2:39 p.m. Stock indicators rallied to records.
"They weren't panicked about the possibility of the economy falling into recession," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. "It wasn't so much that there was weakness in economic conditions but that they wanted to forestall the risks coming from financial markets."
Following the policy vote on Sept. 18, the Federal Open Market Committee continued to discuss communications issues and "additional policy options to address strains in money markets.
"No decisions were made in this session, but it was agreed that policymakers should continue to consider such options carefully," the minutes said, without being specific.
Fed officials expressed concern about inflation at the meeting, citing rising labor costs and a depreciating dollar, the minutes showed. The U.S. currency hit to a record low against the euro this month.
"Inflation risks could be heightened if the dollar were to continue to depreciate significantly," the minutes said.
Yields on federal funds futures contracts show a 64 percent probability that Fed officials would leave the benchmark lending rate unchanged at their Oct. 31 meeting.
The Fed staff "marked down" its fourth-quarter economic growth forecast and "trimmed" the 2008 outlook, the minutes said, without providing details.