Wednesday, April 16, 2008

Fed transcript: '02 deflation fears helped drive down rates

By Martin Crutsinger, AP Economics Writer
WASHINGTON — Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half point in November 2002.
The transcripts, which were released Friday, showed that then-Federal Reserve Chairman Alan Greenspan and his colleagues were concerned about a sluggish recovery from the 2001 recession and the possibility that the country could tumble into a period of deflation, or falling prices.

Greenspan, in the transcripts, said that deflation was a "pretty scary prospect, and one that we certainly want to avoid."

"We are dealing with what basically is a latent deflationary type of economy, and we are all acutely aware of the implications of that economy," Greenspan said.

While the Fed releases edited minutes of meetings of its interest-rate setting Federal Open Market Committee with a three week lag, it does not publish full transcripts until five years later.

The Fed cut interest rates at the November 2002 meeting to 1.25%, as the economy struggled to find its footing after the Sept. 11, 2001 terror attacks and corporate accounting scandals. It was the central bank's only rate move of the year, after it had lowered rates from 6.5% to 1.75% in 11 steps through 2001.

The Fed eventually took rates down to 1% in June 2003 over worries that falling prices could mire the U.S. economy in a similar rut as Japan.

Some critics have argued that there was never a serious threat that the United States would experience a bout of deflation and that the extremely low interest rates engineered by the Fed created a housing boom in this country that drove prices and sales up to record levels only to burst in 2006, sending shockwaves through the economy.

No comments: