NEW YORK (CNNfn) - Federal Reserve policy makers saw lingering sluggishness in the U.S. economy when they voted to cut short-term interest rates by half a percentage point in May, according to minutes of the meeting released Thursday.
"In the Committee's discussion of current and prospective economic developments, members commented that the slowdown in [U.S. economic] expansion ... was likely to be more prolonged than they had anticipated earlier," said the minutes of the May 15 meeting. "(I)ndeed ... it was not entirely clear that the slowing in the growth of the economy had bottomed out."
Given economic conditions at the time – especially a slowdown in industrial production and softness in the labor market – all Fed policy makers agreed it was necessary to cut the central bank's target for the federal funds rate, an overnight bank lending rate.
The only point of contention was the size of the cut. Nine of the 10 policy makers voted to cut rates by half a percentage point, from 4.5 percent to 4.0 percent, while Kansas City Fed Governor Thomas Hoenig preferred a quarter-point cut.
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The Fed is charged with the task of encouraging U.S. economic activity while keeping inflation in check, and it does this by manipulating the fed funds rate. On Wednesday, it cut the rate again by a quarter-percentage point to 3.75 percent. Minutes of this week's meeting are not yet available.
Though Fed policy makers said they saw some risk of inflation from all the money it's pumped into the economy this year – slashing interest rates from 6.5 percent to 3.75 percent – they also thought strong competition would help keep prices and inflation down.
Policy makers thought the economy would most likely begin to recover later in 2001, but it would be important for businesses to unload the backlog of unsold goods currently clogging up their warehouses and for consumers to keep spending as confidently as they have so far.