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By BRIAN BLACKSTONE


WASHINGTON -- Federal Reserve policy makers agreed at last month's meeting that they might need to cut interest rates again as turmoil in the credit and housing markets began to crimp consumer spending.

Some Fed members even saw the risk of a vicious cycle pulling down both financial markets and the economy, and possibly requiring "substantial further easing of policy," according to minutes of the Federal Open Market Committee's Dec. 11 meeting, released yesterday with the usual three-week lag.

At the meeting, the FOMC voted 9-1 to lower the federal-funds rate at which banks lend to each other by a quarter percentage point to 4.25%. That was the third straight reduction since September, bringing the total cut to one percentage point. Boston Federal Reserve Bank President Eric Rosengren dissented in favor of a half-percentage-point cut.

According to the minutes, the extent of the housing slump was worse than expected, and "participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October."

Meanwhile, financial-market strains "could persist for quite some time," the minutes stated, though some officials saw the possibility that conditions could improve more quickly than anticipated, "in which case a reversal of some of the rate cuts might become appropriate."

Though the policy makers decided against issuing a balance-of-risks assessment last month, the tone of the minutes suggests risks are heavily weighted toward economic weakness, and not a quick rebound in economic activity that might lead to inflation.

Fed officials grew decidedly more pessimistic about consumer spending, citing its "marked deceleration" as "tighter credit conditions, higher gasoline prices and the continuing housing correction might be restraining growth in real consumer spending," according to the minutes. As recently as late October, officials had referred to spending as "well maintained."

Fed officials said that while inflation readings were "slightly less favorable" between the October and December FOMC meetings, they still expect core inflation, which excludes food and energy prices, to "trend down a bit over the next few years." Overall "headline" inflation, meanwhile, should slow "more substantially from its currently elevated level," according to the FOMC minutes.

Still, Fed policy makers "remained concerned" about the potential for inflation from high energy and commodity prices, while "some also cited the weaker dollar," which could increase import prices.

The Fed also released details of a Dec. 6 conference call in which officials discussed creating the Term Auction Facility, or TAF, as well as a currency swap agreement with the European Central Bank.

The Fed has auctioned $40 billion in loans to banks through the facility, and more offerings are planned this month. "Meeting participants recognized that a TAF wouldn't address all of the factors giving rise to stresses in money and credit markets," and "a few" officials questioned the need for such a program, according to the FOMC minutes. St. Louis Fed President William Poole voted against establishing a swap arrangement with the ECB, citing the size of the ECB's dollar-denominated reserves.

Write to Brian Blackstone at brian.blackstone@dowjones.com