(AFP) – Oct 9, 2007

WASHINGTON (AFP) — The Federal Reserve's half-point rate cut last month came amid evidence of an "exceptionally weak" housing sector and risks of wider economic problems into 2008, minutes released Tuesday showed.

The minutes from the September 18 Federal Open Market Committee meeting suggested policymakers were worried about a spillover from the housing and credit woes to the broader economy.

At the meeting, FOMC members voted unanimously to cut the key federal funds interest rate by half a percentage point to 4.75 percent.

The move at the time came as a surprise to many in financial markets who anticipated a more modest cut of 25 basis points and that the Fed would not want to show a sense of panic about the economy.

The minutes indicated that the Fed staff in preparation for the meeting projected "moderate" economic growth in the third quarter but had trimmed their forecast for the fourth quarter and through 2008 as a result of housing and credit woes.

But policymakers said that because of the roiling of financial markets amid worries about a credit squeeze, the outlook was questionable.

"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with risks to growth skewed to the downside," the minutes said.

Without a rate cut, the members feared "that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment," according to the minutes.

"In order to forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action."

In an apparent reference to concerns that the rate cut would be seen as bailing out investors who made risky bets, the minutes indicated FOMC members believed the move "should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets."

The minutes also indicated that inflation concerns appeared to be easing.

"With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation," the minutes showed.

The Fed's next move at its October 30-31 meeting remains unclear.

Some analysts had projected a further rate cut but reconsidered the call after US government figures on job creation for August were revised to show a gain of 89,000 jobs instead of a decline of 4,000. The original report had fanned fears of a sharp cooling or even a recession.

Fed members decided on the rate cut before the revision but at the time cast some doubt about the apparent weakness in the labor market.

"Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely," the minutes indicated.

Marie-Pierre Ripert at IXIS Corporate and Investment Bank called the minutes "noteworthy" in that they showed FOMC members "quite worried about potential effects from falling house prices and the tightening in credit conditions on consumer spending."

She said the Fed's next action is "a close call" but that "a 25 basis-point rate cut on October 31 is the most likely scenario."

Beth Gaston Moon at Schaeffer's Investment Research said the futures market is pricing in a 36 percent chance of a 25 basis-point easing at the October 30-31 meeting, but that the market is fully pricing in a cut of at least a quarter-point by December.

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