The Federal Reserve could keep interest rates ultra-low for even longer than investors expect if the economic outlook worsens or inflation drops, minutes from the central bank's last meeting suggested.

The minutes of the Fed's March 16 gathering, released on Tuesday showed lingering concern about the U.S. economy's prospects, with policymakers indicating they were in no hurry to raise interest rates.

The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further, the minutes said.

Such forward guidance would not limit the committee's ability to commence monetary policy tightening promptly, they said.

Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low for some time, according to the minutes, which did not elicit major market reaction.

Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.

Participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth, the minutes said.

The release of the minutes comes on the heels of a U.S. government payrolls report that showed employers added 162,000 jobs in March. Still, the data was marked by a number of seasonal distortions, and the jobless rate remained stuck at 9.7 percent.

In a separate speech on Tuesday, Minneapolis Fed President Narayana Kocherlakota said he would be surprised if the U.S. unemployment rate, managed to dip below 8 percent by the end of 2011.

Housing starts will likely remain low, possibly for several years, he added, although the U.S. economy could recover even without a turnaround in the housing market.

EXTENDING EXTENDED PERIOD

In response to the worst financial crisis in generations, the Fed not only slashed interest rates to the bone but also undertook a host of emergency measures aimed at reviving credit.

Broadly speaking, the Fed's latest assessment of economic conditions was downbeat. The central bank characterized inflation pressures as subdued and likely to remain that way, while noting that expectations for price increases are reasonably well-anchored.

Against that backdrop, a few Fed members indicated they thought the risk of tightening policy too soon was greater than that of waiting too long.

Not everyone agreed, however. Speaking to CNBC television, Richmond Fed president Jeffrey Lacker argued just the opposite.

The risk going forward in this expansion is going to be a little more tilted toward waiting too long, and I'm going to be pretty vigilant about that, Lacker said.

Some investors were taken aback by the Fed's cautious tone given a solid 5.6 percent spurt in U.S. gross domestic product for the fourth quarter.

It shows the Fed will be very deliberative with rate increases, said Kevin Flanagan, chief fixed income strategist at Morgan Stanley Smith Barney. There is no urgency to raise rates for now.

(Additional Reporting by Glenn Somerville, Kristina Cooke and Todd Melby; Editing by Andrew Hay)

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