Fed housing fears rattle market

ARTICLE

WASHINGTON -- Minutes of the Federal Reserve interest rate committee's last meeting, released Wednesday, suggest policymakers might be more worried about the housing slump than previously thought.

The bleak assessment unnerved investors who were betting that the sector's problems wouldn't necessarily spill over into other portions of the economy and sapped strength from the market on a day that had seen triple-digit gains.

The Dow Jones industrial average surged more than 117 points, but then pulled back sharply to close at 12,474.52, up just 11.37 points.

"The concern is that the Fed was seeing something at their last meeting that suggested potentially more pronounced weakness than we had all been anticipating in the economy," said Drew Matus, senior economist at Lehman Brothers Inc.

Policymakers kept interest rates steady at the December meeting. But the central bank left open a possible rate increase, if needed, to thwart inflation.

"All members agreed that the risk that inflation would fail to moderate as desired remained the predominant concern," the minutes said.

But one Fed member, who is not identified in the minutes of the meeting, thought the Fed should have held out the possibility of a rate cut as well.

In its Dec. 12 policy statement, however, the Fed did not speculate about a rate cut. Rather, the policymakers hewed to previous language about the possibility of a rate increase, which most economists think unlikely.

The wording on possible interest rate moves that was suggested by the Fed member might be viewed by some investors "as a first step toward changing the forward-looking language, a sentiment with which we do not entirely disagree," said Stephen Stanley, chief economist at RBS Greenwich Capital.

At the December meeting, Fed policymakers said economic growth had slowed over the course of 2006, partly reflecting a "substantial cooling" of the housing market. That description went beyond the Fed's previous assessment in late October and suggested a sharper slump in housing.

Policymakers cited the need to stay alert for signs that weakness in the housing sector could seriously infect the rest of the economy.

"Considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to consumption could become more evident, especially if house prices were to decline significantly," the minutes said.

Policymakers left their key interest rate unchanged at 5.25 percent at the December meeting. It was the fourth straight meeting without a rate change.

Many economists believe the Fed will do the same at its next meeting, Jan. 30-31, and further into the new year. Many analysts and investors predict an interest rate cut later in 2007