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THE FINANCIAL CRISIS

Growth, inflation weigh on Fed

October 08, 2008|From the Associated Press

WASHINGTON — Even in the midst of a severe meltdown on Wall Street, Federal Reserve officials at their September meeting believed the risks from weaker growth and higher inflation were roughly equal.

The Fed officials discussed the financial turmoil during their closed-door meeting Sept. 16, according to minutes released Tuesday. The meeting occurred the same day that investment bank Lehman Bros. Holding Inc. collapsed and hours before the Fed announced it was extending an $8-billion loan to rescue insurance giant American International Group.

Though no interest rate change came out of that meeting, the minutes showed some members said a policy response from the central bank might be needed.

In its post-meeting public statement discussing future actions, the Fed balanced between worries about economic growth and inflation.

The Fed's action disappointed many investors. They had hoped for a stronger signal that the central bank was prepared to cut rates given the turbulence rocking Wall Street.

Two days after the meeting, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson traveled to Capitol Hill to tell congressional leaders at a private meeting that the credit strains had become much more dire and emergency legislation was needed.

That plea resulted in the passage on Oct. 3 of the largest government bailout in history, a $700-billion package that will allow the government to buy bad mortgage-related debt from financial institutions. The goal is to get financial companies to resume more normal lending.

In a speech Tuesday, Bernanke signaled that the continued turmoil had moved the central bank closer to a rate cut.

Bernanke said the Fed would have to consider whether its current stance of holding interest rates unchanged "remained appropriate."

In the minutes, Fed officials had sounded a more upbeat tone, expressing hope that the government's takeover of mortgage giants Fannie Mae and Freddie Mac might help stabilize mortgage markets and give a boost to the beleaguered housing sector.

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