Discount Minutes Indicate Torn Fed As Two Officials Vote for Rate Rise
By SUDEEP REDDY
July 23, 2008; Page A3
At least two Federal Reserve officials appear to have entered the central bank's policy meeting last month looking for a rate increase, indicating wider discomfort with the Fed's current stance of holding its benchmark interest rate steady at 2%.
The Fed disclosed Tuesday that the boards of two regional Fed banks -- Dallas and Kansas City -- voted in June to raise the discount rate, for direct loans to commercial banks, by a quarter percentage point. The discount rate usually moves in lockstep with the benchmark federal-funds rate, at which banks lend to each other overnight.
Directors of the dozen regional Fed banks, which make loans to commercial banks in their districts, vote periodically on where they would like to set the discount rate, which is now a quarter percentage point above the federal funds rate. The Fed's governors in Washington meet to weigh those requests. Minutes of those meetings offer clues to the thinking of bank presidents ahead of gatherings to set the federal funds rate.
The varied schedules for the regional banks' meetings generally prevent firm conclusions on the meaning behind discount-rate requests. The latest moves came well before the latest bout of financial-sector turmoil.
At the June 24-25 Fed policy meeting, Federal Reserve Bank of Dallas President Richard Fisher was the sole dissenter in the 9-1 decision to hold the federal funds rates steady at 2%, preferring a rate increase. Not all regional bank presidents are voters this year, however, and several have indicated a desire to raise rates before long to address inflation concerns.
The discount-rate requests suggest Federal Reserve Bank of Kansas City President Thomas Hoenig, who isn't a voter this year, may have preferred a rate increase.
In a speech last week, Mr. Hoenig said the Fed's current stance reduces the risk of recession but "almost certainly raises the risk of higher inflation." He said the Fed must monitor inflation developments and raise rates "in a timely fashion."
On Tuesday, Federal Reserve Bank of Philadelphia President Charles Plosser said the Fed would need to start raising rates "sooner rather than later." Mr. Plosser, a voter this year, supported the June decision but dissented on earlier cuts.
Officials such as Fed Chairman Ben Bernanke, and most bank presidents, have indicated greater inflation concerns but support keeping rates steady to address the weakness in employment, housing and financial markets.
Bank directors from Dallas and Kansas City in mid-June recommended a quarter-point increase in the discount rate and noted downside risks to economic growth. They "concluded that they were outweighed by the upside risk of inflation," according to the Fed minutes. "These directors cited the potential for rising energy and commodity prices to spread to other prices and wages, and they noted some indications of elevated inflation expectations." |
