Grim Fed pondered even bolder easing in August

The U.S. Federal Reserve building is seen in Washington June 29, 2011.

WASHINGTON (Reuters) - The central bank in early August discussed a range of unusual tools it could use to help the economy, with some officials pressing for bold new steps to help the economy.

Before settling on a promise to keep rates near zero at least until mid-2013, the Fed examined an array of policy options to shore up a flagging recovery, including tying the path of interest rates to either unemployment or inflation.

"Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence and continued weakness in the housing sector," according to minutes from the central bank's August 9 meeting released on Tuesday.

The minutes said that the few officials who pressed for going beyond the low-rates vow the Fed offered viewed the new guidance "as a step in the direction of additional accommodation."

Prices for U.S. government bonds and oil futures rose after the minutes were released, and the dollar briefly pared earlier gains it had made against the euro.

The U.S. economy sputtered in the first six months of 2011, with gross domestic product expanding at less than a 1 percent annual pace. The jobless rate, meanwhile, remains stuck above 9 percent.

The latest dark sign for the economy came on Tuesday when data showed confidence among consumers plunged in August to its lowest level in more than two years.

At its meeting, the Fed also discussed engaging in further asset buys or shifting the composition of bonds on the central bank's portfolio toward longer-dated maturities.

Purchases of longer-dated securities could further depress long-term rates, though some Fed officials expressed doubt that any of these steps would offer much support to growth.

Still, given the prospect of a protracted snail-paced recovery and tighter fiscal policy, Fed officials scrambled for unorthodox ways they could bolster the recovery.

"In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate," the minutes said.

FORK ON POLICY ROAD

Comments from two top Fed officials on Tuesday highlighted the divided nature of the central bank's Federal Open Market Committee, which sets official interest rates.

Charles Evans, president of the Chicago Federal Reserve Bank and a noted policy dove, said he favored strong central bank accommodation "for a substantial period of time," since the economy now looks to be moving "sideways."

But Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank stopped well short of signaling support for further easing, showing he remains firmly on the hawkish wing of the Fed's policy-setting panel.

Markets are primed for the Fed's next policy meeting on September 20-21, and Evans' comments on CNBC television on Tuesday fueled expectations that the Fed could build on its series of unprecedented moves to prop up the economy.

The remarks by the two policymakers came on the heels of Fed's annual conference in Jackson Hole, Wyoming, where Fed Chairman Ben Bernanke on Friday stopped short of detailing further action by the central bank.

Evans told CNBC television he backs "some of the most aggressive policy actions" now being considered by the Fed, adding that the labor market, with its 9.1 percent jobless rate, looks to be in a recession.

The central bank cut short-term interest rates to near zero in December 2008 and bought $2.3 trillion in mortgage-related and government debt in an effort to spur recovery.

Its decision to announce that it expected to hold interest rates near zero into 2013 sparked three dissents, the most in nearly 20 years, including one from Kocherlakota.

The minutes, however, showed there were also supporters for a more aggressive easing of monetary policy.

(Additional reporting by Jonathan Spicer and Leah Schnurr in New York, and Ann Saphir in Bismarck, North Dakota; Editing by Andrea Ricci)