Report: Two Fed Banks Wanted Discount Rate Hike

Tuesday, 11 Jan 2011 03:01 PM

 

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Directors of Federal Reserve banks in Dallas and Kansas City again requested, unsuccessfully, a 0.25 percent rise in the rate charged to banks for emergency loans, minutes of Fed meetings in November and December showed on Tuesday.

The other 10 regional Fed banks wanted no change in the discount rate. The U.S. central bank's board sided with them, keeping the discount rate steady at 0.75 percent in meetings ahead of its Dec. 14 policy decision.

"Federal Reserve Bank directors noted positive developments that indicated the recovery was continuing, but given ongoing uncertainties, directors remained cautious about the outlook and expected growth to be modest going forward," the Federal Reserve Board said in the minutes.

The directors noted somewhat stronger-than-anticipated consumer spending and expanding manufacturing activity, but also pointed to continued weakness in housing prices and the weak labor market.

The Fed said regional bank directors commented that uncertainty over U.S. fiscal and regulatory policies, the fiscal condition of state and local governments and financial developments abroad were weighing on hiring and capital spending decisions. They generally expected inflation to remain quite low, despite recent rises in food and metals prices.

Against this backdrop, most directors recommended that "the current accommodative stance of monetary policy be maintained."

Those in favor of raising the discount rate described it as a "another step toward restoring a pre-crisis discount rate structure" that would result in a 75-basis-point-spread between the discount rate and the upper end of the Federal Open Market Committee's target rate for the federal funds rate, the main policy tool.

"These directors favored a move toward normalization of the primary credit rate in light of the monetary stimulus already in place," the minutes said.

At its Dec. 14 meeting, the FOMC reaffirmed its commitment to buy an additional $600 billion in longer-term U.S. Treasury debt by mid-2011, offering only a cautious nod to the economy's improving prospects. It offered no policy shift, saying the recovery was still not strong enough to bring down unemployment significantly.

© 2014 Thomson/Reuters. All rights reserved.

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