-- Federal Reserve policy makers put aside concerns about the rising cost of credit at their Aug. 7 meeting because they weren't convinced a slowdown in inflation would last, according to minutes of the session.
Ten days before the central bank was forced to cut a key interest rate, the Federal Open Market Committee was given lower growth forecasts by staff economists and noted that ``strains in financial markets'' jeopardized the expansion. Further turmoil might require a response, Fed officials said.
``Policy makers would need to watch the situation carefully,'' the minutes said. ``For the present, however, given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern.''
The records don't include the Aug. 16 emergency video conference when officials revamped their policy statement and cut the rate the Fed charges banks on direct loans. The benchmark lending rate was kept unchanged.
``Mortgage loans remained readily available to most potential borrowers,'' and the ``supply of credit to finance real investment did not appear significantly diminished,'' the Fed said in the minutes. ``Members expected a return to more normal market conditions, but recognized that the process likely would take some time.''
Traders and economists expect the Fed to lower its benchmark rate at or before the next meeting, on Sept. 18.
Looking to Bernanke
Chairman Ben S. Bernanke may offer insight on the Fed's current assessment of the economic outlook and credit market when he speaks on Aug. 31. Bernanke will address the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, traditionally attended by most Fed governors and district-bank presidents.
As policy makers gathered three weeks ago, reports showed that inflation had slowed while economic growth had accelerated in the second quarter. Gross domestic product rose at a 3.4 percent annual pace in the second quarter, the fastest in more than a year.
On inflation, ``meeting participants believed that the readings for the past few months likely had been damped by transitory factors and did not provide reliable evidence that the recent level would be sustained,'' the minutes said.
Officials kept the target rate for overnight loans between banks, the main policy tool, at 5.25 percent for a ninth straight meeting. While the Fed acknowledged that ``downside risks to growth have increased somewhat,'' citing tumult in financial markets, officials reiterated in the Aug. 7 statement that inflation was the ``predominant'' policy concern.
Signs of Stress
That disappointed some investors and observers, who argued a balanced assessment was warranted by increasing signs of stress in financial markets, sparked by an exodus from securities backed by subprime mortgages.
The Standard & Poor's 500 Index fell 5.7 percent from its record high on July 16 through Aug. 6. The premium on investment- grade corporate bond yields compared with benchmark Treasuries on July 25 jumped the most in five years, data from Merrill Lynch & Co. showed. Sam Molinaro, the chief financial officer of Bear Stearns Cos., where two hedge funds failed in June, said Aug. 3 that the fixed-income market was in the worst shape in 22 years.
Fed officials ``still saw moderate economic expansion in coming quarters as the most likely outcome but that the downside risks to growth had increased,'' according to the Aug. 7 minutes.
Three days after officials met, the Fed pumped $38 billion into the banking system -- the most since the response to the 2001 terrorist attacks -- in its first effort to contain the credit crunch. The effort failed to quell the upheaval, as the amount outstanding of commercial paper, a key short-term financing tool for some finance companies, slid the most in six years.
The following week, with borrowing continuing to dry up, the Fed took steps unprecedented in recent years: It cut the rate on direct loans to banks while issuing a revised outlook that recognized economic risks had risen ``appreciably'' and omitted any mention of inflation.
The Fed announced the actions on Aug. 17 after a videoconference among officials the evening before.
Minutes of the FOMC's Aug. 16 videoconference will be included in records of the Sept. 18 meeting, to be released Oct. 9. The Board of Governors' separate decision to cut the discount- lending rate to 5.75 percent from 6.25 percent will be detailed in another report, around Oct. 16.
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