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fed says we will step in if economy tanks

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    Fed minutes: We'll step in if economy tanks

    According to minutes of its Aug. 7th meeting, the Fed was ready to step in if the economy showed further deterioration.
    August 28 2007: 2:34 PM EDT


    WASHINGTON (Reuters) -- The Federal Reserve acknowledged at its last regular meeting that a policy response might be necessary if financial market conditions worsened, according to minutes of its Aug. 7 meeting released Tuesday.

    "Members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages," the central bank's policy-setting Federal Open Market Committee said.

    "However, 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," the Fed said.

    The Fed at its Aug. 7 held its target for the federal funds rate steady at 5.25 percent, saying the risk that inflation would fail to moderate was its predominant concern, although it noted that risks to growth had increased somewhat.

    Report: Rate cut seen, but not till September
    But the Fed acted unexpectedly on Aug. 17, cutting its discount rate, the rate it charges banks for loans, to 5.75 percent, and acknowledging that risks to growth had increased "appreciably" from the credit crunch afflicting financial markets.

    The minutes released on Tuesday did not include discussions connected to the Fed's Aug. 17 actions. The fed funds rate is an overnight bank lending rate that has a bigger effect on the economy since it influences many consumer loans.

    The minutes show policy-makers agreeing that recent strains in financial markets posed additional risks to economic growth, but believing their forecast of moderate growth would be supported by job gains, rising incomes and foreign demand for goods and services.
 
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