Fed debated QE3 at August meeting

The three Fed dissenters: Richard Fisher of Dallas, Charles Plosser of Philadelphia. and Narayana Kocherlakota of Minneapolis.

NEW YORK (CNNMoney) -- Federal Reserve policymakers debated the possibility of additional stimulus to jumpstart a stumbling U.S. economy at their most recent meeting on Aug. 9.

Among the options that had support of some members was a controversial third round of purchases of U.S. Treasuries, known as quantitative easing -- or QE3 for short -- according to the minutes of that meeting released Tuesday.

The Fed said some members argued that such purchases would drive down interest rates further and was the proper response to the growing signs of economic weakness. At least three members argued for immediately pumping more money into the economy.

"A few members felt that recent economic developments justified a more substantial move at this meeting," said the Fed.

The central bankers also discussed other options. In one, they would sell short-term Treasuries and use the proceeds to buy longer-term debt. The goal: Driving down long-term rates without adding to the cash the Fed has pumped into the economy.

They also talked about cutting the interest rate the Fed pays on excess reserve balances to encourage banks to lend the money rather than to leave the cash idling in accounts at the Fed.

But it was clear that the proposals sparked controversy within the Fed, and that some believe there was little the central bank could do to address growing economic weakness.

"Some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery," said the Fed. Those critics believe that current economic headwinds can lessen only gradually over time, or that recent events had lowered the impact such moves might have.

Those opposing new action feared that pumping additional money into the economy would simply risk an unwanted rise in prices with little benefit to growth.

This is clearly not the final word on the debate among Fed policymakers: They agreed to hold a two-day meeting in September rather than the previously scheduled one-day get-together to further consider what action the central bank might take. That change in schedule was announced Friday.

Joseph LaVorgna, chief U.S. economist for Deutsche Bank, said the minutes suggest that the Fed is getting closer to taking some additional action, though he thinks it will come at the November meeting, not September. He thinks it will be shifting to longer-term Treasuries to drive down those rates without being accused of "printing money."

But LaVorgna also said the minutes demonstrate that Fed policymakers are increasingly worried about the state of the economy and many don't feel they can sit by without taking some kind of action.

"Most policymakers were revising down their growth forecasts for 2011 and 2012, and in turn some were downgrading their inflation assessment, as well," he said.

After the Aug. 9 Fed meeting, the central bank surprised investors and economists by issuing a statement saying it expected to keep its key interest rate at an exceptionally low level through at least the middle of 2013.

That time frame, far more explicit than its previous statement that low rates would continue "for an extended period," led to three dissents from district bank presidents on the rate-setting panel: Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia.

Michael Gapen, economist with Barclays Capital, said the minutes show that those three "inflation hawks" are balanced out within the committee by three members who believe more action is needed sooner rather than later.

"We see these members as likely arguing for further policy measures to be enacted at the September meeting," he said.

The minutes and the suggestion that there might be more asset purchases sooner rather than later helped to lift U.S. stocks Tuesday. Markets had been lower earlier on a very weak consumer confidence reading, but rose immediately after the release of the Fed minutes at 2 p.m. ET. The last round of Fed asset purchases, known as QE2, helped to lift stocks by about 30%. Then they started declining from the peak just before the end of that effort.

Economists: Fed should stay put for now

Despite the disagreement within the Fed, Chairman Ben Bernanke pledged during a speech in Jackson Hole, Wyo., last Friday that the central bank would "do all that it can to help restore high rates of growth and employment." But he noted the limits of help that the Fed could provide for the economy at this time.

The minutes also revealed that Fed policymakers held a previously unannounced videoconference call on Aug. 1 to prepare in case Congress had not raised the debt ceiling and the Treasury had run out of authority to borrow and pay all of the government's bills. The call came the day after President Obama announced a tentative deal between Republican and Democratic leaders in Congress to raise the debt ceiling, but before the vote.

The Fed members generally anticipated that there would be no need to make changes to existing bank regulations, in the way the Fed lends money to financial institutions or in the way it buys and selling Treasuries.

"Participants agreed that the appropriate response would depend importantly on the actual conditions in markets and should generally consist of standard operations," said the Fed. "Some participants noted that such an approach would maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions."