Fed minutes avow growing credit crunch

WASHINGTON - Federal Reserve policymakers acknowledged at their meeting early this month that they might have to act to ease a growing credit crunch, even as they held out hope for "a return to more normal market conditions" without any intervention.

A cut in one interest rate - the discount rate - came 10 days after the Aug. 7 meeting, and analysts are expecting a broader rate cut when Fed Chairman Ben S. Bernanke and his colleagues meet next month. The meeting minutes were released yesterday.

The Fed, however, did not feel an immediate need to step in at the August session.

Instead, the Fed left its key federal funds rate at 5.25 percent, where it has stood for more than a year. It did this even as it acknowledged that the worsening housing slump, credit problems, and turbulence on Wall Street had increased risks to the economy.

Bernanke and his central bank colleagues "expected a return to more normal market conditions," but they recognized that might not be the case, according to minutes of the closed-door meeting.

"A further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response," the minutes stated.

Ten days later - on Aug. 17 - the Federal Reserve took the unusual step of slicing by a half a percentage point the discount rate, which is what it charges banks for loans, to 5.75 percent.

That narrowly tailored move was aimed at propping up sagging financial markets. The Fed also has pumped billions of dollars into the U.S. financial system to help banks and other institutions get over any cash-flow problems and more smoothly carry out their businesses.

Economists and investors believe the odds are rising that the Fed will move to lower its federal funds rate, now at 5.25 percent, by at least one-quarter of a percentage point on or before Sept. 18, its next regularly scheduled meeting. This rate is the interest banks charge one another on overnight loans and is the Fed's main tool for influencing overall economic activity.

A reduction to the funds rate would mean lower interest rates for millions of consumers and businesses.

Credit is the economy's lifeblood. If it becomes too hard to get or too costly, spending and investment by people and businesses can stall, short-circuiting economic growth.

Fed policymakers at the Aug. 7 meeting were hopeful that the economy would be able to weather the financial storm. They predicted the economy would grow modestly in coming quarters. However, they recognized that problems in housing, with bad mortgages and the fallout on Wall Street were raising increasing risks to the economy.