Fed members worried about deep recession

“Signals from the economy continue to come in on the weak side,” said Brian Bethune, economist at Global Insight, who is predicting a half-point cut later this month.

The government reported last week that the economy lost jobs for the third month in a row in March. All told, the nation has lost 232,000 jobs in just three months — stark evidence of just how much the employment market has buckled under the weight of the economy’s woes.

For the first time, Bernanke last week acknowledged that a recession is possible.

According to the Fed minutes, many members thought “some contraction in economic activity in the first half of 2008 now appeared likely.”

The Fed found itself fighting a vicious cycle, where credit problems hurt the economy’s outlook which in turns worsens credit problems, the minutes suggested. There was “evidence that an adverse feedback loop was under way,” the minutes said.

Besides cutting rates, the Fed has taken a number of unconventional steps recently to ease a dangerous credit crisis.

Under one new program, the Fed has been letting big investment firms borrow super-safe Treasury securities and put up more risky investments, including certain shunned mortgage-backed securities as collateral. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis.

Fed policymakers thought the program “could prove useful in preventing an escalation of an unhealthy dynamic” that has gripped credit markets, according to the minutes of a March 10 conference call that led to the creation of the new program.

Separately, in the broadest use of its lending authority since the 1930s, the Fed last month agreed to temporarily let investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks.

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