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Fed worried credit woes could hit growth

China Daily | Updated: 2008-01-04 07:13

Federal Reserve policymakers worried that a credit crunch could sharply brake economic growth and require big interest rate cuts, according to minutes of the Fed's December 11 policy meeting, released on Wednesday.

"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," minutes of the meeting said.

"Such an adverse development could require a substantial further easing of policy," policymakers said.

At the same time, Fed officials 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. Boston Fed President Eric Rosengren dissented, preferring a more aggressive rate cut.

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

Even so, the policymakers 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 rates in September.

"Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain," the minutes said.

Agencies

(China Daily 01/04/2008 page16)

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