(04-11) 09:10 PDT WASHINGTON, (AP) —

Just-released transcripts show the Federal Reserve was worried about the threat of deflation when it decided to cut a key interest rate by a half-point in November 2002.

The transcripts, released Friday, show then-Federal Reserve Chairman Alan Greenspan and his colleagues were concerned about a sluggish recovery from the 2001 recession and the possibility that the country could tumble into a period of deflation, or falling prices.

Greenspan expressed concerns about the country falling into a “deflationary hole.”

“It’s a pretty scary prospect and one that we certainly want to avoid,” Greenspan told other members of the Federal Open Market Committee.

The Fed did cut the federal funds rate, the interest that banks charge on overnight loans, by a half-point, moving it from 1.75 percent down to 1.25 percent, the lowest level in 41 years.

The United States last experienced a prolonged bout of deflation during the Great Depression of the 1930s. But Fed officials worried that the country could fall into the same problems that Japan faced in the 1990s Д a decade of falling prices and a stagnant economy.

The Fed would cut the funds rate one more time the next year, pushing it to a 45-year low of 1 percent on June 25, 2003. The central bank left the funds rate at that level for an entire year until it began a gradual move to raise rates in June 2004.

Some critics have argued that there was never a serious threat that the United States would experience a bout of deflation and that the extremely low interest rates engineered by the Fed created a housing boom in this country that drove prices and sales up to record levels only to burst in 2006, sending shock waves through the economy.

The transcripts show that Fed officials at the time were not that worried about the effects that an extremely low funds rate might have on the economy, arguing that if inflation started rising, the Fed could reverse course and start raising rates but that a bout of deflation would be harder to combat.

On the possibility that a half-point cut might be too much, Greenspan said, “It’s a mistake that does not have very significant consequences. On the other hand, if we fail to move and we are wrong, meaning that we needed to, the costs could be quite high.”

On deflation, Greenspan said, “I don’t think we could adjust all that easily if we were to fail to move and the economy began to deteriorate and we were looking into a deep deflationary hole.”

William McDonough, president of the New York Federal Reserve Bank, argued that if the Fed decided to cut rates by only a quarter-point, financial markets would view Fed officials as “a bunch of wimps, which is not an attractive assessment for a group that is supposed to be a very important public body.”

Current Fed Chairman Ben Bernanke, who had joined the Fed earlier that year as a board member after having been an economics professor at Princeton, supported Greenspan’s recommendation that the central bank cut rates by a half-point.

In discussing the economy, Bernanke said it appeared that the country was experiencing the same type of “jobless recovery” that had occurred for a prolonged period after the 1990-91 recession and that a cut in rates was needed to boost growth.

“A significant rate cut at this point would not be a panacea obviously, but I do think it would help,” he said.

The 2001 recession ended in November 2001, but the country did go through a lengthy period of job losses that did not end until August 2003.

While the Fed releases minutes of its closed-door discussions three weeks after the meetings are held, the full transcripts are only released with a lag of five years.

The transcripts of the eight meetings in 2002 of the Federal Open Market Committee, the Fed panel of board members and regional bank presidents who set interest rates, total 987 pages and are available at the Fed’s Web site.

___

On the Net:

Federal Reserve: «www.federalreserve.gov»

(11-29) 16:22 PST San Francisco (AP) —

State officials have lifted a temporary fishing ban that was imposed after a container ship spilled nearly 60,000 gallons of toxic fuel into San Francisco Bay.

The fishing suspension was lifted Thursday after officials determined that there is no significant health risk from eating seafood caught in areas affected by the oil spill.

State biologists say they tested more than 1,100 samples of fish, mussels and Dungeness crab in San Francisco Bay and coastal waters outside the Golden Gate.

The tests did find unsafe levels of contaminants in mussels from Rodeo Beach and the Berkeley pier, and officials warned the public to avoid eating shellfish from those areas.

Officials say the commercial Dungeness crab and herring seasons can continue as scheduled.

MADRID: The Spanish government approved Friday \18 billion of emergency tax cuts and spending to shore up an economic expansion undermined by a slumping housing market and the global credit shortage.

The measures, to be enacted immediately, will provide a \400 tax rebate to all workers and pensioners, part of \10 billion of outlays this year. The remaining \8 billion is earmarked for next year.

Prime Minister Jose Luis Rodriguez Zapatero is tapping a budget surplus to cushion the effect of a slowing economy, which the International Monetary Fund forecasts will ease by more than half this year to 1.8 percent. House prices in Spain fell in real terms for the first time in 10 years in the first quarter after tripling in the past decade.

“The economic and budget policy of this government in the last four years has allowed us to accrue a surplus in the public accounts,” the deputy prime minister Marнa Teresa Fernбndez de la Vega said at a press conference in Madrid. “This lets us take measures to stimulate the economy, to reinvigorate job creation and to help people and families in greatest difficulty.”

The measures will add 0.2 or 0.3 percentage point to economic growth this year, Finance Minister Pedro Solbes said at the same press conference.

The global credit crunch stemming from the collapse of the U.S. housing market is exacerbating Spains housing slump by restricting funds available for banks and home buyers. Mortgage lending fell 28 percent on the year in January.

“If this episode is prolonged, its effects on the Spanish economy may be significant, since it is an economy in which external financing is a basic element of its growth,” the Bank of Spains governor, Miguel Бngel Fernбndez Ordусez, said this week. “That the real estate cycle matured at the same time as international financial tensions emerged has been particularly unfortunate for our economy.”

One measure included in the stimulus package ends the fees charged by banks and notaries to extend a mortgage, making it cheaper for home owners to lower their payments by stretching out the life of the loan. The government also abolished the wealth tax and announced a \200 million program to help unemployed construction workers find jobs.

Home sales imploded in the first quarter, declining 23 percent on the year. That left the stock of unsold homes in Spain at more than 600,000, according to Alberto Espelosнn, a strategist at Ibercaja Gestiуn.

The Ministry of Public Works has accelerated its tendering process already this year, Solbes added. The ministry awarded \6 billion of contracts in the first quarter, almost double the amount in the year-earlier period.