Directors at Federal Reserve district banks saw “considerable slack” in the U.S. economy and tame inflation in the weeks before the central bank’s Nov. 3 decision to expand record monetary stimulus.
Ten of the Fed’s 12 regional banks in October recommended leaving the rate charged on direct loans to commercial banks unchanged. For the fourth straight period, two Fed banks, Dallas and Kansas City, requested an increase in the discount rate by a quarter-point to 1 percent, said the minutes of Board of Governors meetings, released today in Washington.
“Federal Reserve Bank directors generally viewed the pace of economic recovery as slow, with unemployment rates too high and underlying inflation subdued,” the report said. “Labor markets remained weak,” and while some commodity prices had risen, “with considerable slack seen in labor and product markets, inflation was expected to remain quite low.”
The directors’ comments and requests preceded the Nov. 2-3 meeting of the Fed’s Open Market Committee, where governors and regional presidents voted 10-1 to buy $600 billion of Treasuries through June in a bid to boost growth and lower unemployment persisting near a 26-year high. Today’s report didn’t discuss the asset purchases.
The decision has been dubbed QE2 by investors and economists for the second round of quantitative easing, a term for monetary policies that change the quantity of bank reserves.
The FOMC said in its Nov. 3 statement that the jobless rate was too high and inflation too low relative to levels that policy makers deem consistent with the central bank’s legislative mandate for maximum employment and stable prices.
Discount-rate changes are requested by boards of directors at the 12 regional Fed banks, and each president can recommend a vote. Kansas City Fed President Thomas Hoenig dissented from the Nov. 3 FOMC decision, and Dallas Fed President Richard Fisher said Nov. 8 the action may be the “wrong medicine” for the economy’s ailments.
The directors’ requests are subject to final review and determination by the Fed Board in Washington. Central bank governors review requests about every two weeks.
The Fed’s Washington-based Board of Governors expressed “no sentiment” for changing the discount rate and kept it at 0.75 percent on Nov. 1, in line with requests from the other 10 Fed regional bank boards.
The Fed raised the rate by a quarter-point in February as part of its measures to exit emergency stimulus and lending programs; in August, the Fed stepped up consideration of more easing of monetary policy.
The rate is currently 50 basis points above the Fed funds rate, which has been kept at zero to 0.25 percent since December 2008. Prior to August 2007, the Fed kept the rate, also known as the primary credit rate, 1 percentage point above the target for the benchmark federal funds rate.
Among directors backing an increase in the discount rate, “it was emphasized that an increase in this spread would not represent a change in monetary policy, but rather a move toward normalization” of the rate, the minutes said.
As of Nov. 24, banks were borrowing $1 billion from the Fed’s discount window, down from a record $110.7 billion at the height of the financial crisis in October 2008.
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