Fed minutes: credit woes may force more rate cuts

Members of the Federal Reserve's interest rate setting committee worried last month that a credit crunch could sharply brake economic growth and require big interest rate cuts, minutes of the U.S. central bank's December meeting released on Wednesday show.
By: Mark Felsenthal: Reuters
"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy," the minutes said.

At the same time, members of the Fed's rate-setting Federal Open Market Committee realized that financial market conditions might improve more rapidly than they expected, which would make it appropriate to raise borrowing costs, reversing earlier cuts.

The Fed cut rates by a quarter-percentage point to 4.25 percent at the meeting.

Risks to growth had risen since their last meeting in large part due to deteriorating credit markets, the Fed said.

Even so, the policy-makers weighed the lagged impact of cumulative interest rate cuts, and a strong labor market, which suggested the economy retained some forward momentum. Overnight, interbank borrowing costs stood at 5.25 percent when the Fed began trimming borrowing costs in September.

"Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate," the minutes said.

(With additional reporting by David Lawder; Editing by Neil Stempleman)