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Federal Reserve Considers Rate Cut Prudent

[Nov 11, 2007.]


When members of the Federal Reserve opted to cut a benchmark interest rate in September, they considered it "the most prudent course of action," according to the Fed's recently-released meeting minutes.

The rate cut marked the first one in 4 years, making it all the more significant. Fed regulators cut a benchmark interest rate by one-half of a percent to 4.75%. The policymakers were apparently concerned about the effect the housing crisis and the credit crunch might have on the overall U.S. economy.

The minutes stated, "Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside."

According to the minutes, Federal Reserve members also felt that, "Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead."

Fed officials believed that reducing the federal funds rate would offset the impact of difficult financial conditions on the overall economy. The interest rate is considered to be the Federal Reserve's main method of impacting the nation's economic situation.

The Fed further warned that, if the benchmark rate had remained the same, there would be "a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness" in the overall economy.

Fed officials did not anticipate a rise in inflation, given the current economic conditions. However, they did predict a worsening jobless rate over the near term. The nation's job force declined by 4,000 in August. That marked the first decrease in jobs in 4 years. The loss of jobs has been viewed as a possible harbinger of recession, but Fed officials hope that the interest rate cut will help keep an economic downturn at bay.

Julie Ann Amos
November 11th 2007

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