Fed eyes options to offset end of QE3 The US Federal Reserve is considering cutting the interest it pays to banks on their reserves in a dramatic move to offset an eventual slowing of its $85bn-a-month asset purchases. The central bank offered no new hints on when it could "taper," reiterating that it was still expecting such a move "in coming months," but the discussion of alternatives at the rate-setting Federal Open Market Committee suggests it is keen to slow its buying. Cutting the extra interest on reserves banks hold with the Fed would drive down already low overnight interest rates even further, probably to just a few basis points, hurting bank profits but adding extra stimulus to the economy. According to the minutes of its October meeting, most officials on the FOMC thought such a move "could be worth considering at some stage" as a way to signal continued easy monetary policy after they start to slow asset purchases from $85bn a month. US equities turned negative and bond prices extended their losses while the dollar rallied further after the minutes. Alan Ruskin, strategist at Deutsche Bank said the tone of the minutes was a strong indication that officials "are keen to taper, and will certainly taper if data is OK" and that it "reinforces the message that a December tapering is very much on the table if most recent labour market trends are maintained." He added: "There is less and less to surprise the market here, with the prevailing view that a December tapering is possible if not likely, if the next employment report is solid." The S&P 500 fell 0.4 per cent, reversing an earlier climb of 0.4 per cent and capping the markets" recent foray into record territory. The yield on 10-year Treasury notes climbed from 2.74 per cent to 2.77 per cent and the dollar benefited as the euro extended its losses. The Fed had an extensive discussion of policy plans at the meeting, indicating it is keen to taper the asset-buying that has driven global financial markets for the last year, but also that it wants to offset reduced purchases with a new form of easing. The option that won the most obvious support was a cut in the 25 basis points of interest that the Fed pays to banks on the $2.5tn in reserves they have accumulated as a result of its asset buying programme. "Most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions," say the minutes. Other options the Fed discussed included lowering its 6.5 per cent unemployment rate threshold for a first rise in interest rates. But only a couple of officials supported the idea, with others warning it could raise doubts about the solidity of their guidance. A few participants supported the possibility of an extra threshold for inflation but in general the FOMC thought the benefits were modest and uncertain, and that the idea was hard to communicate. Most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage. The Federal Reserve's October meeting minutes Another possibility was to expand on the Fed's statement to describe what would trigger a rise in interest rates. It could also say that rates are likely to rise only slowly when they do eventually take off. Ben Bernanke, the Fed chairman, used such language in a speech on Tuesday night. He said rates are likely to stay low "for a considerable time after the asset purchases end" and "perhaps well after the unemployment threshold is crossed." The minutes show Fed officials still expect to "trim" their asset-buying in the coming months as a result of improvement in the labour market. But they also considered scenarios where they would lower purchases before "an unambiguous further improvement in the outlook was apparent." "In those circumstances, it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time," the minutes say. Some officials wanted to set a total size for the asset purchase programme or a timetable for when it would end, but others thought that would go against the Fed's determination to tie purchases to the economic data. They were split on whether it made sense to slow Treasury purchases faster than buying of mortgage-backed securities or at the same speed. Additional reporting by Michael MacKenzie in New York