Fed mulled balance sheet expansion in September

"Most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery," the minutes of the September 20-21 meeting said.

Fed officials discussed tools to ease monetary policy that ranged from rebalancing the Fed's portfolio to lengthen its average maturity and put more downward pressure on long-term interest rates -- the step they ultimately took -- to providing explicit guidance about their goals for the labor market.

In a statement it issued after the meeting, the Fed warned of significant risks to the already weak U.S. economy as it launched its new plan to lower borrowing costs and bolster the battered housing market.

Two Fed officials wanted stronger action, while three objected to taking any new measures at all, the minutes said. Ultimately, the three officials -- Dallas Federal Reserve Bank President Richard Fisher, Philadelphia Fed chief Charles Plosser and Narayana Kocherlakota of the Minneapolis Fed -- dissented from the Fed's decision.

The central bank has been struggling to find a way to spur a stronger recovery and bring down the U.S. unemployment rate, which remained stuck above 9 percent in September for a fifth straight month.

It cut overnight interest rates to near zero in December 2008 and bought $2.3 trillion in bonds to further rekindle economic growth.

As its became clear the recovery was faltering, it took the additional step at a meeting in August of committing to hold overnight borrowing costs at rock bottom levels through mid-2013, and then it said it would rebalance its bond holdings.

In evaluating the range of options available to them last month, a number of Fed officials felt further bond buying was the most potent initiative the central bank could muster.

Large-scale asset purchases -- also called quantitative easing -- have been a lightening rod for controversy abroad and at home, with critics charging the Fed with setting the stage for inflation and debasing the dollar.

Policymakers also discussed setting explicit objectives for the Fed's long-range goals for unemployment. While most officials agreed greater transparency was worthwhile, many felt it would be necessary to communicate those objectives in depth -- something for which the Fed's terse post-meeting statement is ill-suited.

Officials decided they needed more time to study the potential side-effects of lowering the interest rate the Fed charges banks on excess reserves.

(Reporting by Mark Felsenthal; Editing by Andrea Ricci)