Federal Reserve policy makers put aside concerns about the rising cost of credit at their Aug. 7 meeting because they weren't convinced a slowdown in inflation would last, the central bank said.
Ten days before the Fed was forced to cut a key interest rate, the Federal Open Market Committee was given lower growth forecasts by staff economists and noted that "strains in financial markets" jeopardized the expansion. Further turmoil might require a response, Fed officials acknowledged.
"Policy makers would need to watch the situation carefully," the minutes said. "For the present, however, given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern."
The records don't include the Aug. 16 emergency video conference when officials reversed course and cut the discount rate, saying that risks to economic growth had "increased appreciably." The benchmark lending rate was kept unchanged.
Policy makers underestimated the contagion from subprime credit markets to less risky borrowers, the minutes showed.