The US Federal Reserve held back from cutting interest rates by a half-point in June for fears of signalling to Wall Street it had come to end of its campaign to stimulate an economic recovery, it emerged yesterday.
The central bank's decision to cut rates by just a quarter-point on 25 June came as a shock to the markets, which believed the Fed had signalled a bolder move.
The minutes revealed that Robert Parry, the San Francisco Fed president, was not the only one to advocate a half-point cut - although he was the only one to vote for it. It also emerged that one member of the 12-strong Federal Open Markets Committee was in favour of keeping rates unchanged.
The 25 June move triggered a collapse in the bond market, punishing hedge funds and sending bond yields - a key source of borrowing - surging by 40 per cent. Some observers believe the episode has tarnished the credibility of the Fed and its chairman Alan Greenspan, whom analysts believe had hinted at an intention to cut by a half-point with warnings about the risk of deflation.
But the minutes show that the majority favoured the lesser cut because of signs of a possible upturn in economic activity, tax cuts and spending increases in the pipeline and the fact that monetary policy was already "very accommodative".
"Some members commented that a larger reduction might be misread as an indication of more concern among policymakers about the economic outlook than was in fact the case," the minutes said. "Moreover, a 50 basis point reduction... might be mistakenly interpreted... as a signal that the committee had come to the end of its policy easing moves - a judgement they were not prepared to make at this time."
The minutes show committee members rejected the need for so-called alternative monetary policies, such as purchases of long-term bonds - which had been a sign that the Fed was prepared to launch an aggressive precautionary battle against deflation.
"The members agreed that current economic conditions and the prevailing stances of monetary and fiscal policy made the need to use unusual monetary policy tools a quite remote possibility," the minutes said.
Mr Parry dissented in favour of a half-point reduction as "insurance against continued sluggishness in economic activity and further declines in inflation measures to undesirably low rates".
He was not the only member advocating such a move, the minutes showed. "Some commented that a good case could be made for a half percentage point easing, though all but one of these members could support the smaller decrease," the minutes said.
The meeting marked the first time that the Fed's forecasting staff turned positive on the 2003 outlook. Previous descriptions of the staff forecast used terms such as "muted" and "sluggish".