Three Fed Banks Sought an Increase in Discount Rate

Discussion in 'Wall St. News' started by THE-BEAKER, Sep 3, 2008.

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    One-quarter of the Federal Reserve's regional district banks lobbied to raise the discount rate in July, signaling rising pressure to increase borrowing costs to banks even as economic growth slows.

    Citing a rising danger of inflation, the boards in Chicago, Dallas and Kansas City sought a quarter-point increase in the discount rate from 2.25 percent, according to minutes of officials' discussions prior to the Aug. 5 policy meeting that were released today in Washington. The other nine Fed district banks asked for no change, in line with the decision to keep the discount rate and benchmark federal funds rate unchanged.

    The minutes indicate broader support for lifting interest rates than revealed by the tally at last month's Federal Open Market Committee meeting, where just one of the 11 members voted for an increase. The division comes as officials debate the likely impact of the retreat in commodities on consumer prices, which surged the most since 1991 in the year to July.

    ``It sounds like there's a streak of conservatism emerging at the Fed,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

    Minutes from the Aug. 5 FOMC meeting, released last week, showed that officials agreed their next move would be to increase rates, without reaching a conclusion on the timing of such a decision.

    Directors seeking higher rates ``cited indications that higher input costs were being passed through to product prices and that inflation expectations had risen,'' the minutes said. The officials ``judged that the upside risks to inflation were of greater concern than the downside risks to growth.''

    Inflation Pressure

    Federal Reserve Chairman Ben S. Bernanke said on Aug. 22 that inflation should ease later this year and in 2009, while warning that policy makers will act if price increases don't slow over the ``medium term.'' Crude oil has dropped about 25 percent from its record $147.27 a barrel on July 11.

    The rate is helping spur record borrowing from the Fed by banks trying to obtain cheap credit as damage from the collapse of the U.S. subprime mortgage market restrains lending. Large financial institutions have reported $510 billion in credit losses and writedowns since the beginning of last year.

    The central bank's discount-window lending climbed to a daily average of $18.5 billion in the week ended Aug. 27, the fourth record in six weeks. By contrast, banks are paying 2.81 percent to borrow from each other for three months.

    Market Stress

    The majority of Fed bank directors ``noted that stress in financial markets and the ongoing housing contraction were likely to damp economic growth further in the near term and saw appreciable downside risks to growth,'' today's minutes said. ``However, they also noted that higher energy and food prices could pass through to core inflation measures.''

    The Federal Open Market Committee, then composed of five bank presidents and six Fed governors, voted 10-1 on Aug. 5 to leave the main federal funds rate, which covers overnight loans between banks, at 2 percent.

    Charles Evans, who became president of the Chicago Fed a year ago, doesn't vote on interest rates this year. He said in an Aug. 15 speech that while growth risks had recently increased, inflation dangers ``remain elevated and a concern.''

    The Chicago Fed board altered its request on July 24 to an increase after voting on June 26 and July 10 to keep the rate unchanged, the minutes said. The Dallas and Kansas City Fed boards also voted for a rate increase ahead of the previous FOMC meeting in June.

    Lone Dissent

    Dallas Fed President Richard Fisher was the lone voting member to dissent from the Aug. 5 FOMC decision, favoring an increase. It was his fifth dissenting vote this year. Kansas City Fed President Thomas Hoenig, who doesn't have a rate vote this year, didn't comment on the U.S. economic outlook or monetary policy in a speech yesterday.

    Directors of the 12 regional Fed banks vote on their preference for the discount rate every few weeks. Those votes give the Board of Governors in Washington an indication of how the regional directors view credit costs and monetary policy. The Board of Governors in Washington has final approval.

    The presidents of the district banks are separate from the banks' boards of directors, which are composed mostly of executives from banking and other industries, and picked by member commercial banks and the Fed board. Each bank president is nominated by its board of directors and approved by the board in Washington.

    Sworn In

    Fed Governor Elizabeth Duke was sworn in Aug. 5, while fellow Governor Frederic Mishkin resigned from the Fed effective Aug. 31 to return to teaching at Columbia University.

    The Fed's so-called primary discount rate applies to financially healthy institutions with short-term cash needs. The rate beginning in August 2007 was set at a half percentage point above the federal funds rate before the gap between the two rates was narrowed to a quarter-point in March.

    Also in March, the Fed opened up lending at the discount rate to investment banks as part of efforts to prevent a global financial meltdown and rescue Bear Stearns Cos. from bankruptcy.