Fed's Not Forgetting Inflation

Federal Reserve officials appeared to still be more concerned about inflation than the potential for a meltdown in the credit world at their Aug. 7 meeting, but they did think they might have to take steps to calm the situation, according to the minutes of the gathering.

The credit turmoil, spurred by the discombobulation in the mortgage market, worsened afterward, and 10 days following the policy conference the Fed lowered the discount rate.

The Fed didn't mention a rate cut specifically in the minutes, released Tuesday, but it did provide hints that such a move was being considered at the time.

"[A] further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully," the minutes said.

On Aug. 17, the discount rate was reduced by 50 basis points to 5.75%. The discount rate is the interest banks are charged for borrowing from the Fed.

However, at the meeting, the bankers reiterated many of their long-held fears that the economy could advance too fast.

The Fed said that "economic activity picked up in the second quarter from the slow pace in the first quarter. On average, the economy expanded at a moderate pace during the first half of the year despite the ongoing drag from the housing sector."