"Some participants saw the decline in yields on Treasury securities and other instruments as an indication that the expansion of excess reserve balances was putting downward pressure on market rates," say the minutes, while "some others viewed the configuration of rate movements as consistent with reduced concerns about inflation and with lower term premiums in a more settled economic environment."

Not surprisingly, when it came time for the policy vote, the FOMC was not inclined to move any closer to implementing an "exit strategy."

"In their discussion of monetary policy for the period ahead, Committee members agreed that no significant changes to its policy target rate or large-scale asset purchase programs were warranted at this meeting," the minutes say.

"Although the economic outlook had improved further in recent weeks and the risks to the forecast had become more balanced, the level of economic activity was likely to be quite weak and resource utilization low," they continue. "With substantial resource slack likely to persist and longer term inflation expectations stable, the Committee anticipated that inflation would remain subdued for some time."

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

In the end the FOMC voted unanimously to do the full $1.45 trillion worth of agency and agency MBS purchases while stretching those purchases out through the end of the first quarter to avoid market disruptions. But there was disagreement, and if some had had their way purchases would have been expanded.

"With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook," the minutes reveal. "Another member believed that the recent improvement in the economic outlook could warrant a reduction in the Committee's maximum purchases."

The minutes go on to say that "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."

There had also been a discussion about asset purchases and their reserve implications earlier in the meeting following a staff presentation.

"Participants noted that the primary influence of the (asset purchase) programs is likely through the cumulative effect that they generate on the publicly available stocks of securities," the minutes say. "However, they also observed that the rate of new purchases could have an effect on asset prices, especially of MBS."

"Given this possibility, participants remarked that a gradual reduction in the pace at which the Federal Reserve buys agency debt and agency MBS could help promote a smooth transition in markets as the announced asset purchases are completed," they add.

"Participants expressed a range of views about the rate at which asset purchases should be slowed," the minutes go on. "Some suggested tapering quickly and completing the purchases by year-end, while a few preferred slowing the rate of purchases over a longer period in order to maintain flexibility regarding the pace and the cumulative amount purchased and thus potentially better calibrate the programs to evolving economic and financial market conditions."

The Fed staff also briefed the FOMC on "the likely implications of very high reserve balances for bank balance sheet management and for the economy."

"The staff's assessment, based in part on consultations with market participants, was that many banks were currently comfortable holding high levels of reserves as a means of managing liquidity risks, and these balances or further increases along the lines implied by the announced programs were not likely to crowd out other lending through pressures on capital positions," the minutes say.

"As the economy improves, however, banks could seek to lower their levels of reserve balances by purchasing securities, thereby putting downward pressure on market interest rates, or by easing their credit standards and terms in order to expand lending," they continue. "Such effects, if significant, would provide further impetus to economic growth."

The staff concluded that "these effects would likely emerge only gradually and that their magnitude could be quite limited."

But policymakers weren't' so sure. "some participants thought that declining demand for reserves might already be putting downward pressure on yields."

The minutes say "participants expressed a range of views about the likely stimulative effect of a further expansion of reserve balances on economic activity, as well as the potential impact of elevated reserves on inflation expectations.

The Treasury had recently announced its intention to dramatically decrease the balance in its Supplementary Financing Account (SFA) at the Fed. Since the previous Fall, the Treasury had been selling special T-bills and placing the proceeds in the TSA account to help the Fed drain or sterilize rising bank reserve balances.

With the scaling back of the TSA there was concern among FOMC members that the effect would be to push reserves even higher.

"Some meeting participants noted that the announced decrease in the balance in the ... SFA would increase reserves in the banking system unless it were offset by Federal Reserve actions or by a further reduction in borrowing from the Federal Reserve's various credit and liquidity facilities, and that these increases could be expansionary."

"Others noted that the decrease in the SFA could well be temporary and, in any event, that the macroeconomic effects of the increase in reserves would probably be limited in the current environment," the minutes add.

As in previous meetings, the staff presented an update on "the continuing development of several tools that could help support a smooth withdrawal of policy accommodation at the appropriate time."

The minutes list "executing reverse repurchase agreements on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility, available to depository institutions, to reduce the supply of reserve balances; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate."

"Participants expressed confidence that these tools, along with the payment of interest on reserves and possible sales of assets from the Systems portfolio, would allow them to remove policy accommodation at the appropriate time and pace," the minutes continue.

"Completing development of these tools would remain a top priority of the Federal Reserve," they add.

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