Minutes of the Fed's closed-door meeting on Dec. 15-16 revealed that a "few members" thought that the Fed's $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac might need to be expanded and extended beyond its current end date of March 31. Such an additional dose of stimulus would be especially needed if the economic recovery were to weaken, they argued.
However, one member thought the program could be "scaled back" given the improvement in economic and financial conditions.
The debate over the future of the program comes amid uncertainties about the vigor of the budding economic recovery.
At the December meeting, Fed policymakers decided not to make any changes to the program. At their September meeting, they opted to slow the pace of the purchases, wrapping them up by the end of March, rather than the end of 2009.
The minutes don't identify speakers by name but seeks to provide a more detailed account of the Fed's private discussions.
Some Fed officials remained concerned about the economy's ability to mount a self-sustaining recovery once government supports are removed. To that end, those officials worried that improvements seen in the housing market might be "undercut" this year as the Fed's mortgage-buying program winds down, the government's home buyer tax credits expire at the end of April and home foreclosures grow.
Getting the housing market back on firm footing is a key ingredient to a lasting recovery. The collapse of the housing market, which dragged down home prices with it, was the catalyst for the longest and worst recession to hit the country since the 1930s.
"Generally the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness," the minutes said.
To nurture the recovery, the Fed at the December meeting kept its key bank lending rate at a record low near zero and pledged to hold it there for an "extended period." The goal: low interest rates will entice people and businesses to boost spending, which will fuel economic growth.
Economists said the Fed is all but certain to leave rates at record lows at its next meeting on Jan. 26-27 and probably for a good chunk of this year.
"Overall, there is nothing here to suggest that interest rates will rise for quite some time," Paul Ashworth, economist at Capital Economics., said of the Fed minutes. Ashworth is among the economists predicting economic growth will slow in the second half of this year as President Barack Obama's $787 billion stimulus package of tax cuts and increased government spending fades.
Most Fed officials don't currently see inflation as a problem because companies have "little ability to raise their prices" in the fragile economic environment. But they had mixed views about inflation risks.
Some noted that rising prices of oil and other commodities could boost inflation pressures down the road. Others thought investors' expectations of inflation could edge up because of large federal government budget deficits and vast sums of money the Fed pumped into the economy to fight the financial crisis.
However, others predicted that the sluggish recovery and "slack" in the economy — meaning factories operating well below capacity and the weak labor market — would keep inflation under wraps.
At the December meeting, Fed staff gave several presentations on research into "inflation dynamics."
The biggest challenge facing Fed Chairman Ben Bernanke and his colleagues is to decide when to start boosting interest rates. Moving too soon could short-circuit the recovery. Waiting too long could unleash inflation.