Heightened concern about the harsher-than-expected housing slump was a key factor in the Federal Reserve's decision to hold interest rates steady last month.

Minutes of the Fed's deliberations last month show that policymakers revealed increased concern over the real estate bust — even as they were reiterating that their No. 1 aim was to see inflation, which has been calming down, continue to recede.

The Fed held interest rates steady at the December session. But it also left the door open to a possible rate increase, if needed, to thwart inflation. However, one Fed member — who was not identified in the minutes of the meeting — thought the central bank should have held out the possibility of a rate cut as well.

That member thought the Fed's statement issued last month "should emphasize that policy could be adjusted in either direction, depending on the evolution of the outlook for inflation and economic growth."

In its Dec. 12 policy statement, however, the Fed didn't specifically mention the possibility of a rate cut. Rather, the policymakers hewed closely to previous language about the possibility of a rate increase, something most economists think it not likely to happen.

At their last meeting of 2006, Fed chairman Ben Bernanke and all but one of his central bank colleagues agreed to leave an important interest rate unchanged at 5.25 percent, the fourth straight meeting without changing the rate.

Many economists believe the Fed will hold rates steady into part of the new year. The Fed's next rate move, many analysts and investors predict, will probably be a rate cut later in 2007.

At their December meeting, Fed policymakers said economic growth had slowed over the course of 2006, partly reflecting a "substantial cooling" of the housing market. That description went beyond the Fed's previous assessment in late October and suggested a sharper slump in housing could be taking place.

Fed policymakers suggested that the economy was in for a period of sluggish growth ahead, owing to the housing slump, but they didn't indicate that the economic expansion was in danger of fizzling out. Nonetheless, policymakers said people needed to stay alert for any signs that weakness in the housing sector that could seriously infect the rest of the economy.

"Several members judged that the subdued tone of some incoming indicators meant that the downside risks to economic growth in the near term had increased a little and become a bit more broadly based than previously thought," the Fed minutes said.

Fed policymakers also made clear that they wanted to see "core" inflation — which excludes food and energy prices — move lower. They stuck to their forecast that this was likely to occur in the months ahead.

That being said, "all members agreed that the risk that inflation would fail to moderate as desired remained the predominant concern," according to the minutes.