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Some Fed members favor more activist role

Federal Reserve policymakers considered a third round of bond purchases at their last meeting, and at least two members said the weakening economy might require it.
/ Source: The Associated Press

Federal Reserve policymakers considered a third round of bond purchases at their last meeting, and at least two members said the weakening economy might require it.

In the end, the Fed stopped short of expanding its portfolio of investments. Instead, it opted to shift $400 billion of its investments to try to lower long-term interest rates.

Minutes, or records, of the Sept. 20-21 meeting show the two officials, who were not named, were willing to go along with the Fed's policy action because policymakers did not rule out taking further steps.

In its statement, the central bank also a bleak economic outlook, saying its sees "significant downside risks," including volatility in overseas markets.

Three members of the committee, all regional bank presidents, dissented from the Fed's statement for the second straight meeting. That marked the highest level of dissent at the Fed in nearly 20 years.

Chairman Ben Bernanke has acknowledged that the effort would not be a "game-changer." He said the move could lower long-term interest rates by about one-fifth of a percentage point, during testimony before Congress last week.

But Bernanke also said last week that the economic recovery "is close to faltering." He said the Fed is prepared to take further steps to support it.

The U.S. economy is barely growing and not producing enough jobs to lower the unemployment rate, which has been stuck at about 9 percent for two years.

In September, employers added 103,000 net jobs. While that was enough to ease recession fears, it takes about 125,000 jobs a month just to keep up with population growth.

Without more jobs and higher pay increases, consumers are likely to keep spending cautiously. Many have already cut back on spending in the face of steeper food and gas prices. Consumer spending accounts for 70 percent of economic activity.

Lower rates could help in a number of ways. Homeowners could refinance their mortgages at lower rates, leaving them more money to spend or pay down debt. Businesses could expand or invest at lower costs, allowing some to hire more workers.

But economists doubt the Fed's latest move will do much because interest rates are already at historic lows. Last week, Freddie Mac said the average rate on the 30-year mortgage fell below 4 percent for the first time ever, to 3.94 percent.

In addition to shuffling its portfolio, the Fed has said it plans to keep short-term rates at record lows until at least mid-2013, assuming the economy remains weak.

The three regional bank presidents also opposed that decision. The dissenters argued that the actions the Fed has taken are raising the risks that inflation, currently at low levels, could become a problem once the economy begins to grow at stronger speeds.

Other Fed officials, however, are pushing for the central bank to do more. Some support a third round of bond buying that would expand the size of the Fed's already record holdings of Treasury securities. One Fed official, Charles Evans, president of the Chicago Federal Reserve Bank, has argued for a change in the Fed's guidance that would link any pledge to keep rates at low levels until unemployment, currently 9.1 percent, falls below 7.5 percent.