Former Federal Reserve Vice Chairman Donald Kohn said on Wednesday the Fed might need to give serious consideration to further easing if the economy weakens more than expected and underlying inflation comes down.

I would certainly want to weigh lots of arguments pro and con on any of those options the Fed has outlined as possible steps, Kohn said in a telephone interview.

Fed Chairman Ben Bernanke has said the Fed could strengthen its promise of low rates, extend maturities of assets it holds, or buy more bonds if it decided it needed to provide a further boost to the economy.

Traders said stock markets rallied mid-afternoon when the Wall Street Journal website posted an article saying Kohn and another former top Fed official, former Monetary Affairs Director Brian Madigan, gave qualified endorsements of further bond buying to spur the weak economy.

Madigan and Kohn said the Fed should consider a third round of bond purchases only if inflation slows from recent elevated levels and if the economy continues to underperform, the Journal said.

http://blogs.wsj.com/economics/2011/08/03/former-top-fed-officials-signal-support-for-qe3-if-inflation-slows/]

The Fed ended its second installment of long-term asset purchases, worth $600 billion, on June 30.

Purchases of that order of magnitude could be helpful at the margin, Madigan was quoted as saying.

Madigan declined to comment.

The Fed's policy-setting Federal Open Market Committee meets on August 9.

(Washington newsroom 1 202 898 8300)

Ben Bernanke Inflation Federal reserve