By Mark Felsenthal and Jason Lange
WASHINGTON (Reuters) - U.S. Federal Reserve officials felt the struggling economy might soon need more help when they met in September, and discussed several ways to provide support, including the possible adoption of a price-level target.
The Fed officials who gathered on September 21 focused both on the possibility of buying more longer-term U.S. government debt to drive borrowing costs lower and ways to nudge the public into expecting higher levels of inflation in the future to spur spending now, the central bank said on Tuesday.
Policy-makers had a "sense that (more) accommodation may be appropriate before long," minutes of the meeting said.
The U.S. central bank's policy committee released its members' views as international debate intensified over how the Fed's easy monetary policy was driving down the dollar and in turn boosting the currencies of many emerging economies.
To help shift inflation expectations, policy-makers debated providing more detail on what rates of inflation they would prefer, and showing a willingness to tolerate even higher inflation on a temporary basis, a policy approach known as price-level targeting.
They also discussed the possibility of targeting a path for GDP growth.
The news helped U.S. stocks trim losses, with major indexes ending the day just in positive territory.
The Fed has kept overnight rates near zero since December 2008 and has bought about $1.7 trillion in bonds to lower other borrowing costs to help the economy recover from the worst recession since the 1930s.
The minutes bolstered expectations the Fed will move to drive down rates further by restarting purchases of Treasury debt as soon as its next meeting on November 2-3 in a new round of quantitative easing, or QE2 as it has come to be known.
However, they provided no details about the scope of potential purchases.
TAILORING THE MESSAGE
If the central bank were able to foster higher expectations of future inflation, businesses and consumers may not want to postpone purchases, thereby providing an immediate boost to the economy.
After their September 21 meeting, policymakers said they stood ready to provide more support if needed to keep the recovery on track and raise inflation from undesirably low levels.
The economy lost a step over the summer, sapped by the drying up of government stimulus measures and the shock of a sovereign debt crisis in Europe.
The September meeting's minutes showed several Fed officials were close to pulling the trigger.
"Many members considered the recent and anticipated progress toward meeting the committee's mandate of maximum employment and price stability to be unsatisfactory," they said.
The minutes, however, showed not everyone was on board.
In a speech in Denver on Tuesday, Kansas City Federal Reserve Bank President Thomas Hoenig, a steadfast opponent of the central bank's super-easy monetary policy, fleshed out his stance saying more easing it would do little to aid recovery and could spark inflation.
"We have to recognize that QE2, while a possibility, is not necessarily what we want to do given the benefits versus the risks," he told the National Association of Business Economics in Denver. "At this point, with a modest recovery under way and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy."
New York Fed President William Dudley, an influential dove on the Fed's policy-making committee, recently suggested the purchase of $500 billion in Treasuries would equate to cutting short-term rates by 50 to 75 basis points. Hoenig said the effect could be less than 10 to 25 basis points.
A basis point is 1/100th of a percentage point.
"There simply is no strong evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down," Hoenig said.
Expectations the Fed will soon launch a new round of asset purchases have led investors to move their cash into emerging markets in search of a higher return.
The flood of capital has pushed up the values of currencies in nations from Latin America to Asia, prompting some countries to complain loudly about the loss of export competitiveness and the risk of building asset bubbles.
Brazilian Finance Minister Guido Mantega renewed his warning that easy monetary policies in advanced nations like the United States could spark a currency war as developing countries seek to protect their economies.
"The Federal Reserve is promising quantitative easing, which is monetary policy's last resort," Mantega told the Council of the Americas in New York. "I don't think it will reactivate the economy, but it will weaken the dollar."
Hoenig, one of the Fed's most consistent hawks more concerned with the threat of inflation than unemployment, said the Fed should be mindful of such spillover effects.
"We are not an island," he said. "We affect other countries, they know that and they react to us, and therefore we are affected by our actions as it comes back to us."
(Additional reporting by Ann Saphir in Denver and Walter Brandimarte in New York, Editing by Chizu Nomiyama)