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Fed Open To Linking Rate Hike To Economic Gauge

And Narayana Kocherlakota, president of the Minneapolis Fed, said last month that he thought the Fed should pledge to keep rates low until unemployment falls below 5.5 percent â¿¿ a level Kocherlakota said could take four years or more to achieve.

Some members oppose such moves. They argue that by tying a rate hike to a level of employment, it raises the risk of leaving rates too low for too long, which heightens the threat of inflation.

On Monday, Chairman Ben Bernanke sought to reassure investors about the Fed's timetable for keeping its short-term rate ultra-low. The plan doesn't mean the Fed expects the economy to be weak through 2015, Bernanke said in a speech to the Economic Club of Indiana. Rather, he said policymakers plan to keep rates low well after the economy strengthens.

The minutes also showed that the Fed structured its latest stimulus program around the purchase of mortgage bonds. It did so after members agreed that helping a nascent housing recovery was a good way to lift the broader economy.

Many participants agreed at the meeting that more bond purchases would support the economy by putting downward pressure on longer-term rates. That encourages more borrowing and spending, which drives growth.

According to the minutes, Fed members compared the effectiveness of buying Treasury bonds to that of mortgage-backed securities.

"Some participants suggested that, all else being equal, (mortgage bond) purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement of late," according to the minutes.

A few members expressed skepticism that additional bond purchases would help while also expressing concerns about inflation.

The average rate on the 30-year fixed mortgage has been below 4 percent all year. This week the rate fell to a record low of 3.36 percent. While home sales are rising, they remain well below healthy levels.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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