Response needed if conditions worsen: Fed

WASHINGTON Tue Aug 28, 2007 2:15pm EDT

A guard makes his rounds outside the Federal Reserve in Washington August 20, 2007. The Federal Reserve acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, minutes of its August 7 meeting, released on Tuesday, show. REUTERS/Kevin Lamarque

A guard makes his rounds outside the Federal Reserve in Washington August 20, 2007. The Federal Reserve acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, minutes of its August 7 meeting, released on Tuesday, show.

Credit: Reuters/Kevin Lamarque

Related News

WASHINGTON (Reuters) - The Federal Reserve acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, show minutes of its August 7 meeting, released on Tuesday.

"Members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages," the central bank's policy-setting Federal Open Market Committee said.

"However, 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 Fed said.

The Fed at its August 7 meeting left the federal funds rate unchanged at 5.25 percent, saying the risk that inflation would fail to moderate was its predominant concern, although it noted that risks to growth had increased somewhat.

However, the Fed acted unexpectedly on August 17, lowering the discount rate, the rate it charges banks for loans, to 5.75 percent, and acknowledging that risks to growth had increased "appreciably" as a result of financial market deterioration and tighter credit conditions.

The minutes released on Tuesday did not include discussions connected to the Fed's August 17 actions.

The minutes show policy-makers agreeing that recent strains in financial markets posed additional risks to economic growth, but believing their forecast of moderate growth would be supported by job gains, rising incomes, and foreign demand for goods and services.