http://www.federalreserve.gov/fomc/minutes/20030625.htm
Minutes of the Federal Open Market Committee June 24-25, 2003 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., starting on Tuesday, June 24, 2003, at 2:30 p.m. and continuing on Wednesday, June 25, 2003, at 9:00 a.m. ============================== Fed Considered Bigger Rate Cut In Late June But Impact Was Feared By John M. Berry Washington Post Staff Writer Friday, August 15, 2003; Page E01 Some Federal Reserve officials wanted to lower a key short-term interest rate by half a percentage point when they met in late June because of continued economic weakness and concerns about falling inflation, according to minutes of the meeting released yesterday. But the central bank's policymaking group chose to cut the rate by a quarter-point instead, in part because of concerns that the larger cut would send the wrong message about their view of the economy and their intentions for future action. Many financial market participants were disappointed by the Fed's decision because they had come to expect a half-point cut in the central bank's target for overnight rates because of the public statements made before the meeting by a number of Fed officials. The degree of disagreement among the officials at the meeting was unusual. Not only were members of the Federal Open Market Committee, the central bank's top policymaking group, divided over the size of the cut, one member wanted no cut at all, according to minutes. Given the strong desire among Fed policymakers for consensus, only one official, Robert T. Parry, president of the San Francisco Federal Reserve Bank, voted to dissent, the minutes show. Parry wanted the larger cut "as insurance against continued sluggishness in economic activity and further declines in inflation measures to undesirably low rates," the minutes said. The minutes do not otherwise identify by name which officials argued for which actions. But they do say that the committee member who would have preferred no cut agreed to go along with a quarter-point reduction. The committee's action at the June meeting reduced the Fed's already extremely low 1.25 percent target to 1 percent, and the group left it unchanged when they met again Tuesday. The officials were considering a half-point cut in June because there was still no solid evidence then that relatively weak U.S. economic growth was picking up, and there was concern that the nation's low inflation rate could fall further than they thought was safe. "Some commented that a good case could be made for a half-percentage point easing," the minutes said. But the committee members arguing for the smaller reduction felt that at 1.25 percent the target was already so low that it was helping stimulate economic activity, and some in the group said they saw some preliminary signs of better growth. That group also noted that large federal income tax cuts enacted earlier in the year were to become effective in July and would further stimulate the economy. Some of those arguing for the quarter-point cut also felt that the larger reduction might be misinterpreted by the market in at least two ways. First, a half-point cut might be seen "as an indication of more concern among policymakers about the economic outlook than was in fact the case," the minutes said. In addition, it could have been taken as a signal that the committee would not cut rates again anytime soon, a judgment that the group was not ready to make, the minutes added. As Federal Reserve Chairman Alan Greenspan disclosed in congressional testimony last month, there was also an extended discussion of steps the Fed could take to stimulate the economy even if the target for overnight rates was at or close to zero. Such a situation, though regarded as a remote possibility, could arise if the inflation rate fell to zero, or if broad measures of prices of goods and services began to decline, a condition known as deflation. Lowering the overnight rate target close to zero "could have adverse repercussions on the functioning of some sectors of the money market," but the committee agreed that would not stop them from reducing rates to that point if economic conditions required it, the minutes said. There was no description of such "adverse repercussions," but Greenspan has acknowledged that money market mutual funds might have to shut down if overnight rates were close to zero. The committee reached no decision on what additional steps might be taken to stimulate the economy in such circumstances, but they discussed a number of options that could be used, the minutes said. Again, no details were provided, but Greenspan and several other officials have said such actions might include purchasing longer-term government securities from the public to pump more money into the banking system. One reason bond prices have fallen and longer-term interest rates have risen since the Fed's June meeting is that the officials' decision to cut rates by only a quarter-point , and their statement at the time explaining it, appeared to indicate they had no intention of making purchases of longer-term securities anytime soon.
