updated 10/14/2009 5:28:39 PM ET 2009-10-14T21:28:39

Amid uncertainties about strength of the budding recovery, Federal Reserve policymakers last month were conflicted over whether to expand or cut back a program intended to drive down mortgage rates and prop up the housing market, according to a document released Wednesday.

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In the end, Fed Chairman Ben Bernanke and his colleagues agreed to slow down the pace of a $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac. Instead of wrapping up the purchases by the end of this year, the Fed said it would do so by the end of March.

But minutes of the Fed’s closed-door deliberations on Sept. 22-23, revealed some members thought “an increase” in the mortgage securities buying program could help the economy recover more quickly. Another member believed “a reduction” was warranted because the recovery was showing signs of picking up.

The minutes don’t identify speakers by name, but rather seek to provide a more detailed account of the Fed’s discussions.

The central bank last month also agreed to slow down purchases of $200 billion in debt from Fannie and Freddie, although there were no fractured thoughts on that action.

At the same time, the Fed held its key bank lending rate at a record low near zero. It pledged to hold it there for an “extended period” to nurture the recovery. Private economists say rates will stay at super-low levels into part of next year.

Fed policymakers “judged that the costs of growth turning out to be weaker than anticipated could be relatively high,” according to the minutes.

The Fed left open the possibility of expanding or scaling back its programs depending how economic and financial conditions unfold.

Economists from Barclays Capital Research said the minutes showed “a growing divergence” among Fed policymakers.

“The minutes ... only hint at the apparent tensions developing between the hawks and doves,” said economist Paul Ashworth of Capital Economics.

Among the issues on policymakers’ minds was how the economy will hold up once government supports — including President Obama’s $787 billion stimulus package of tax cuts and increased government spending — fade.

Fed policymakers “expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned,” according to the minutes.

The housing market led the country into recession. It needs to get back on stronger footing for the national economy to return to full health. Home sales have firmed, helped by low mortgage rates and an $8,000 tax credit for first-time home buyers, Fed officials noted. That credit is scheduled to expire at the end of November.

Another concern is how consumers — whose spending accounts for 70 percent of all economic activity — will hold up in the months ahead given job cuts, the loss of wealth from housing and stocks hit by the recession, and hard-to-get credit.

Households still face “considerable headwinds,” the minutes said.

Retail sales fell 1.5 percent last month, the Commerce Department said Wednesday, a plunge that reflected the end of the government’s popular Cash for Clunkers program. Still, that drop was less than the 2.1 percent fall economists expected.

Removing autos, sales rose a better-than-expected 0.5 percent, led by gains at furniture stores, general merchandise stores and specialty clothing stores.

Not only are consumers likely to be cautious spenders, but businesses indicated they would be “cautious in hiring and investing even as demand for their products picked up,” according to the minutes.

Against this backdrop, “the economic recovery was likely to be quite restrained,” and the labor market will log “only a slow improvement,” Fed officials believed.

The nation’s unemployment rate — now at a 26-year high of 9.8 percent — will drop to 9.25 percent by the end of 2010, the Fed said. It will fall to about 8 percent by the end of 2011. Private economists predict that the unemployment rate won’t drop to a more normal 5 or 6 percent until 2013 or 2014.

Inflation, meanwhile, should stay subdued, the minutes said.

Most Fed policymakers anticipated that “slack” in the economy would prevent companies from jacking up prices or wages. But some policymakers were “skeptical” about whether such slack — referring to plants and other businesses operating well below capacity — was a useful barometer for determining future inflation pressures.

All Fed policymakers, however, recognized the importance of keeping close tabs on “inflation expectations” of investors, consumers and businesses and to be on the lookout for any changes in their behavior as a result.

To keep inflation expectations “well anchored,” Fed policymakers agreed they must clearly communicate that they have the tools and the political will to reel in the unprecedented amount of money the central bank has pumped into the economy.

That will be a high-wire act for the Fed. Removing those supports too soon could short circuit the recovery, while removing them too late could unleash inflation.

Even with all the concerns about the pace of future growth, Fed policymakers suggested that the worst recession since the 1930s was over.

Most thought an “economic recovery was under way” and that growth in the second half of this year was better than they had anticipated in August, the minutes said.

Private analysts believe the economy grew at a pace of at least 3 percent in the third quarter, helped by the a burst in car sales from the now defunct clunkers program. The economy contracted at a pace of 0.7 percent in the second quarter.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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