Federal Reserve officials reduced their target for overnight interest rates by half a percentage point early last month because they feared a possibly extended period of sluggish economic growth and hoped the cut would "enhance the odds of a robust rebound in economic activity next year," according to minutes of the Nov. 6 meeting released yesterday.
Several of the policymakers also were concerned that the boost they had given the economy with their 11 rate cuts last year was waning and that banks had tightened their lending terms this year. This was making credit more expensive for borrowers, even though the Fed's target for overnight rates had not changed since last December, the minutes said.
The "soft spot" in the economy was seen as a serious enough problem that the officials "agreed monetary policy could do little to improve the performance of the economy in the near term." But some of them expected the rate cut to show up in longer-term market interest rates, such as those on home mortgages, "with favorable implications for spending next year."
One reason the policymakers were willing to lower the target to 1.25 percent was that they saw little risk that the action would increase inflationary pressures in the near future, the minutes continued. Furthermore, if growth were to pick up unexpectedly, the latest cut could be reversed quickly, the officials agreed.
The minutes also explained why the officials decided to say in the statement issued after the meeting that they regarded the risks to their long-term goals of stable prices and sustainable economic growth as balanced. Many financial analysts were puzzled by that conclusion because the risks of continued weak growth appeared to the analysts to be much greater than the risk that inflation would worsen.
Saying the risk of economic weakness was greater, as the group had said after the previous meeting in late September, "would raise the odds of an overreaction in financial markets" to the half-point rate cut, the officials feared. In particular, market participants might assume that more rate cuts were in the works, an impression the officials did not want to convey, the minutes said.