Fed Left Plans for Further Cuts Dependent on Data (Update4)

By Craig Torres

Oct. 9 (Bloomberg) -- Federal Reserve policy makers left their Sept. 18 meeting without any specific plan for further interest-rate cuts because they were unsure how markets and economic growth would respond, minutes of the meeting show.

``Further actions would depend on how economic prospects were affected by evolving market developments and by other factors,'' according to the records, released today in Washington. Any statement on the balance of risks to the economy ``could give the mistaken impression that the committee was more certain about the economic outlook than was in fact the case.''

The report reinforces comments by Fed officials including Vice Chairman Donald Kohn this month, which show the central bank hasn't committed to a series of rate reductions. Kohn said Oct. 5 that policy makers must be ``nimble'' in setting policy because of risks to both growth and inflation.

Fed officials ``all'' concluded it was best to lower their benchmark rate by half a point to 4.75 percent, double the amount that most economists forecast, the minutes show. The release includes summaries of conference calls by Fed officials on Aug. 10 and Aug. 16. Policy makers discussed changing the lesser-used discount rate on Aug. 10, before they reduced it half a point on Aug. 17, the minutes said.

Bonds fell after the minutes were published. The yield on the benchmark 10-year Treasury note rose 1 basis point to 4.65 percent at 4:05 p.m. A basis point is 0.01 percentage point. Stock indexes rallied to records.

`Weren't Panicked'

``They weren't panicked about the possibility of the economy falling into recession,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``It wasn't so much that there was weakness in economic conditions, but that they wanted to forestall the risks coming from financial markets.''

Two Fed district-bank presidents today noted that while credit markets are improving, they remain under stress. St. Louis Fed chief William Poole said ``we do not know'' how long it will take to return to normal. San Francisco's Janet Yellen said conditions may not return to the ``business as usual'' of the first half.

Following the policy vote on Sept. 18, the Federal Open Market Committee continued to discuss communications issues and ``additional policy options to address strains in money markets.''

`Consider' Options

``No decisions were made in this session, but it was agreed that policy makers should continue to consider such options carefully,'' the minutes said, without being specific.

The Aug. 10 call showed the Fed discussed an ``adjustment'' to the discount rate as the central bank sought to deal with growing tumult in credit markets. The New York Fed added $62 billion into the banking system Aug. 9 and Aug. 10, the largest amount of temporary liquidity injections since Sept. 12, 2001.

At that time, the Fed refrained from lowering the discount rate, the charge it makes to banks for direct loans.

Fed officials six days later debated a discount-rate cut, with one participant questioning the ``appropriateness'' of such a move. The call ended with a unanimous vote in favor of a statement that said ``downside risks to growth have increased appreciably.''

The Fed cut the discount rate half a percentage point the following morning to 5.75 percent. The rate is usually 1 percentage point above the federal funds rate.

Fed officials continued to express concern about inflation at the September meeting, citing rising labor costs and a depreciating dollar, the minutes showed. The U.S. currency has slid to a record low against the euro this month.

``Inflation risks could be heightened if the dollar were to continue to depreciate significantly,'' the minutes said.

`More Confident'

The Fed's preferred price gauge, which excludes food and energy costs, rose 1.8 percent in August from a year earlier, the third straight month within the 1 percent to 2 percent comfort range stated by several officials. Fed officials ``were a little more confident'' that the decline ``would be sustained,'' the minutes showed.

Yields on federal funds futures contracts show a 64 percent probability that Fed officials will leave the benchmark lending rate unchanged at their Oct. 31.

The FOMC expressed some skepticism in their meeting last month about initial Labor Department figures that showed the first decline in U.S. payrolls in four years. The August figures were later revised to show a gain of 89,000 jobs, from the previous estimate of a 4,000 decline. Employers hired 110,000 in September.

Job Market

``Labor markets across the country generally remained fairly tight,'' the Fed minutes said. At the same time, officials discussed concerns about layoffs at financial-services companies and the risk that declining home prices could hurt consumer spending, which ``could feed back on employment and income.''

Housing markets ``remained exceptionally weak,'' the minutes said, and ``the faster pace of foreclosures as subprime mortgage rates reset was also seen as posing a downside risk'' to residential real estate.

Housing starts fell to a 12-year low in August, and the inventory of existing homes for sale stood at 10 months in September, the highest on record, government and private reports show.

Home prices in 20 metropolitan areas fell 3.9 percent in the 12 months through July, according to the S&P/Case-Schiller home- price index. That's sapped consumer confidence, which fell more than forecast to 99.8 in Sept. from 105.6, according the Conference Board's index.

The Fed staff ``marked down'' their fourth-quarter economic growth forecast, and ``trimmed'' the 2008 outlook, the minutes said, without providing details.

``We do not know how financial markets will evolve, and we do not know how households and businesses will respond to financial developments,'' Kohn said in a speech in Philadelphia last week. ``We will need to be nimble in adjusting policy to promote growth and price stability.''

Last Updated: October 9, 2007 16:06 EDT