Fed may cut rates 'substantially'

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The Federal Reserve's interest rate-setters say the credit crunch could lead to a situation that will require "substantial" rate cuts.

The comments came in the minutes from their 11 December meeting, when they cut rates for the third time to 4.25%.

They said that risks to growth had risen since their last meeting, mainly due to deteriorating credit markets.

But they also recognised that if financial market conditions improved quickly then rate rises may be needed.

"Some members noted the risk of an unfavourable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit," the minutes said.

"Such an adverse development could require a substantial further easing of policy," they added.

"The (stock) market is cutting losses as people are interpreting the Fed minutes as indicating that there will be additional rate cuts, or other measures to lower rates, sooner rather than later," said Michael James from Wedbush Morgan in Los Angeles.

The Dow Jones fell sharply after the release of figures showing manufacturing contracting, and added to its losses after oil prices hit $100 a barrel.

But they rebounded after the minutes were published.