Fed minutes show Oct rate cut was "close call"

WASHINGTON (Reuters) - The Federal Reserve was unsure last month whether lower borrowing costs were needed to cushion the U.S. economy from a housing slump and credit market woes but, in a "close call," decided to cut interest rates as an insurance policy, minutes of the meeting released on Tuesday show.

"Many members noted that this policy decision was a close call," the minutes said.

The Fed projected U.S. economic growth to slow in 2008 to between 1.8 and 2.5 percent, sharply down from the 2.5 to 2.75 percent forecast in June. Policy-makers lowered their forecast because of the tightened terms and reduced availability of non-standard mortgages, weakness in housing and rising oil prices, a summary of the forecast said.

In a new step toward greater central bank transparency, the Fed released a summary of its economic projections through 2010 with the minutes of the policy meeting.

The U.S. central bank trimmed benchmark rates by 0.25 percentage point to 4.5 percent at its October 30-31 meeting, making for a total of 0.75 point in rate reductions at the last two meetings. Policy-makers opted for the October rate reduction because tighter credit had made the stance of monetary policy somewhat restrictive, the minutes said.

Fed members worried about financial markets that were still showing stress from concerns about bad credit.

"Participants generally viewed financial markets as still fragile and were concerned an adverse shock ... could further dent investor confidence and significantly increase the downside risks to the economy," the Fed said.

The Fed was more sanguine on inflation, expressing some confidence that recent moderation on core inflation, which strips out energy and food prices, could be sustained.

At the same time, policy-makers saw factors including soaring oil prices and the weakening dollar as having the potential to put upward pressures on core prices in the near term.

Moreover, Fed officials worried that persistently higher readings for overall inflation could unhinge inflation expectations, which have to date remained well contained.

They have said since the October meeting they believe the two rate reductions should be sufficient to buffer the economy as it enters a rough patch that may last into next year.

That stance is at odds with financial markets, which generally expect the Fed to lower rates to 4.25 percent at its next policy meeting on December 11. Implied prospects for a December Fed ease were as high as 96 percent late Monday but dipped to 84 percent before the minutes as housing construction data offered a glimmer of hope for the battered sector.

Stocks .DJI fell and bonds turned positive in choppy trade as the minutes chilled hopes for a December rate cut.

(Reporting by Mark Felsenthal and David Lawder; Editing by James Dalgleish)