Fed: Contraction to Continue Despite Moves

By Jeannine Aversa

WASHINGTON -- Even as Federal Reserve officials slashed their key interest rate to a record low and pledged to use other unconventional tools to fight the worst financial crisis since the 1930s, they still feared the economy would be stuck in a painful rut for some time.

Documents released Tuesday provided insights into the Fed's historic decision to ratchet down its rate from 1% to near zero at its Dec. 15-16 meeting. In the first action of its kind in the Fed's 95-year history, Fed Chairman Ben Bernanke and his colleagues created a target range for its rate, putting it at zero to 0.25%.

Despite the aggressive action, "the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial," according to the Fed document.

In fact, Fed officials expected the economy would "contract sharply" in the final three months of 2008 and in "early 2009," the document said. Some participants suggested "the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome."

Against that backdrop, Fed officials last month signaled rates would stay at record low levels for a while in an effort to cushion the blows from a recession that started in December 2007.