The most potent tool, a third round of asset purchases that markets have dubbed QE3, was raised as a possibility by some officials, according to Federal Open Market Committee meeting minutes, released with the customary three-week lag today.
"A few members felt that recent economic developments justified a more substantial move," the minutes showed. But they settled on making a conditional commitment to keep short-term interest rates near zero until mid-2013, one of the Fed's few remaining easing options now that rates are at a record low.
Fed officials met a few days after data showed the economy barely grew in the first half and the unemployment rate remained above 9 per cent in July, sparking recession fears.
An August 9 statement following the FOMC meeting showed three out of 10 voters were against the easing option the majority eventually settled on.
What was not known -- and was revealed in the minutes today -- was that there was another minority wanting to ease even further.
"Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates," the minutes revealed, without elaborating on how many people were in favour of QE3, nor under what conditions the program would be implemented.
Some officials suggested that extending the average duration of the Fed's existing portfolio by selling bonds with short maturities and buying those with longer maturities could have a similar effect as buying new securities outright.
Only a few participants at the FOMC meeting thought that lowering the interest rate banks get for reserves they keep with the Fed -- now 0.25 per cent -- would help the economy, suggesting the tool is unlikely to be used. A minority of Fed officials thought none of the tools would likely do much to boost the economy.
"While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes," the minutes said, in a sentence that some analysts viewed as a sign that more easing is forthcoming after the September 20-21 FOMC meeting.
"There is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet," said Michael Feroli, economist at JP Morgan Chase.
In his most recent speech, Mr Bernanke said on Friday that the Fed still has options to support the economy. But he didn't provide details or commit to use any new tool, saying only that the Fed will meet for two days in September -- instead of one as originally planned -- to allow for a fuller discussion of the central bank's possible responses to the weak economy.
Fed officials were downbeat on the economy, the minutes showed. The central bank's staff reduced its growth forecasts for the second half of 2011 and for 2012 "notably". Unemployment is seen staying high until the end of next year.
Officials also expressed doubts about the underlying strength of the US economy more than two and a half years after the recession ended.
"Many participants also saw an increase in the downside risks to economic growth," the minutes revealed.
There have been mixed signals on the economy since Fed officials last met. While consumer spending rose robustly in July, signalling some momentum for the economy in the third quarter, recent surveys have suggested a sharp slowdown in manufacturing.
WSJ
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