Policymakers at the US Federal Reserve judged in September that credit markets were likely to restrain economic growth in the period ahead, although financial markets were expected to stabilize over time, according to minutes released on Tuesday.

The minutes from the September 18 Fed policy-setting meeting suggested policymakers at the central bank were worried about a spillover from the housing and credit woes to the broader economy.

At the meeting, Fed policymakers unanimously agreed to slash interest rate by a half percentage point to 4.75 percent. That surprised economists as most of them had been expecting a quarter-percentage-point cut.

In preparation for this meeting, the Fed staff continued to estimate that real GDP increased at a moderate rate in the third quarter, said the minutes.

However, the staff marked down the fourth-quarter forecast, reflecting a judgment that the recent financial turbulence would impose restraint on economic activity in coming months, particularly in the housing sector.

The staff also trimmed its forecast of real GDP growth in 2008 and anticipated a modest increase in unemployment.

"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with risks to growth skewed to the downside," said the minutes.

The minutes said tighter credit conditions were likely to weigh particularly on residential investment and to a lesser extent on other components of aggregate demand in coming quarters.

Meeting participants also noted that financial market conditions, though having seemingly improved somewhat in most recent days, were still fragile and that further adverse credit market developments could well increase the downside risks to the economy, the minutes said.

As for inflation, Fed policymakers recognized that incoming data on core inflation, excluding food and energy, continued to be favorable and they were generally a little more confident that the decline in inflation earlier this year would be sustained, according to the minutes.

(Xinhua News Agency October 10, 2007)