Federal Reserve policy-makers last month discussed whether they should increase asset buying if the economic outlook worsened and some argued that more aggressive purchases would aid the recovery.

Some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS (mortgage-backed securities) could help to reduce economic slack more quickly than in the baseline outlook, according to minutes of the Fed's September 22-23 meeting out on Wednesday.

The U.S. central bank held interest rates near zero as expected after the meeting of its policy-setting Federal Open Market Committee (FOMC) and opted to extend its mortgage debt buying campaign until the end of March 2010 from a previously announced close of December 31, 2009, while keeping the total size of the purchases the same at $1.45 trillion.

The U.S. central bank is buying agency mortgage debt together with longer-dated U.S. government bonds as part of its efforts to stimulate activity, and made plain that this approach could be reopened if necessary.

Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated, the Fed said.

Policy-makers also raised predictions for growth over the next 18 months and said the balance of risks to their forecasts was balanced, but remained wary that the economy still remained quite fragile as it exited the worst recession in 70 years.

Under these circumstances, the Committee judged that the costs of growth turning out to be weaker than anticipated could be relatively high, the Fed said.

The U.S. dollar weakened somewhat and U.S. government bonds trimmed price losses on the news, which analysts said had a dovish tilt that showed hawks on the committee were so far not making a big impact despite better recent economic data.

It cements the view that the Fed will hold interest rates for a long time, said Richard Franulovich, senior currency strategist at Westpac in New York.

Policy-makers stressed inflation was likely to remain subdued given the persistence of substantial slack in the economy and with future price expectations stable.

The initial reading on the minutes could be read bullishly (for bonds) because of the discussion about increasing asset purchases. This means the Fed is still focusing on the slack of the labor market, said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

(Additional reporting by Richard Leong and Gertrude Chavez-Dreyfuss in New York, Editing by James Dalgleish)

Westpac