INSTANT VIEW: FOMC minutes - severe downturn possible

NEW YORK (Reuters) - Members of the U.S. Federal Reserve's policy-setting committee worried at their most recent meeting that housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday show.

KEY POINTS: * Fed sees further restrictions in credit availability, weakness in housing markets straining economy * Fed says staff projection showed "contraction of real GDP" in first half 2008, slow rise in second half * Fed says monetary policy alone can't fully address housing, financial market woes, but lower rates a help

COMMENTS:

AXEL MERK, PORTFOLIO MANAGER, MERK HARD CURRENCY FUND, PALO ALTO, CALIFORNIA:

"They are trying to justify what they are doing. One of the things that is becoming more apparent is that the Federal Reserve seems to be aware of the challenges that are out there. What they have been saying until recently is that inflation pressures are going to abate in the near future and therefore we can lower rates as much as possible. Now one of the things they say, for example, is recent information on inflation has been disappointing. It seems that their focus is on the financial system, they are admitting it, and it's a very dangerous game. It's a very precarious path, they will have their hands full for the next few months."

PETER KENNY, MANAGING DIRECTOR, KNIGHT EQUITY MARKETS, JERSEY CITY, NEW JERSEY:

"I think it was very balanced. The sense that rates had to come down and policy had to ease, and there was that overriding theme coupled with the sense that outward-looking data was supporting the notion that inflation was going to ease. That should be music to the market's ears.

"Of course the question is, will inflation ease. It's very hard for the market to have faith in that, seeing that all drivers for inflation on a year-over-year basis are extraordinarily inflationary, whether it be fuel, commodities or any sector therein. Yet, the Fed seems to feel quite strongly it will moderate in the second half of '08 and into '09. The (stock) market could have sold off significantly more aggressively."

RICHARD SICHEL, CHIEF INVESTMENT OFFICER, PHILADELPHIA TRUST CO, PHILADELPHIA:

"Some of the words I see are a bit troubling. Some of their thoughts were maybe more negative than we might have believed at that point. It's that they're using words like "prolonged" and "severe." They're not predicting it, but they're not ruling it out. The inflation thoughts are also more on the negative side. Inflation expectations can be sort of self-fulfilling. This makes their choices (for the next rate-setting meeting) less clear."

MATTHEW MOORE, ECONOMIC STRATEGIST, BANC OF AMERICA SECURITIES LLC, NEW YORK:

"There was nothing surprising -- they didn't really tell us what Fisher and Plosser wanted instead of 75 basis points. The statement that some participants expressed concerns about falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated -- I think that is what is leading to the bid for Treasuries."

DUSTIN REID, SENIOR CURRENCY STRATEGIST, ABN AMRO, CHICAGO:

"The impact of the FOMC minutes has been pretty muted. The minutes are relatively dovish on interest rates and bearish on the U.S. economy. But markets have already priced that in. There was really nothing new in the minutes and that's why we're seeing very little reaction."

STEPHEN MALYON, CURRENCY STRATEGIST, SCOTIA CAPITAL, TORONTO:

"Since these minutes have come we have received an update from Fed Chairman (Ben) Bernanke so we have a pretty good idea of where the Fed sees the risks to the economy. Bernanke appeared to focus more on the downside risks to growth while remaining optimistic that inflation would slow down."

MARKET REACTION: * BONDS: U.S. Treasury debt prices on short end hold onto modest gains. * CURRENCIES: The dollar little changed versus yen and euro. * STOCKS: U.S. stock indexes add to losses; Nasdaq falls 1 percent. * RATE FUTURES: Rate futures build on earlier gains. EARLIER DATA FROM APRIL 8-

Pending sales of previously owned homes fell a bigger-than-expected 1.9 percent in February to the lowest reading on record, according to a report from a real estate trade group on Tuesday that pointed to more troubles in the beleaguered housing market.