Four regional Fed banks sought discount rate hike ahead of July FOMC hold
The minutes reveal a hawkish contingent one bank larger than the public FOMC vote suggested, since Kansas City Fed President Jeff Schmid does not hold a policy vote this year and his view would not otherwise have been visible. That reinforces the picture from the FOMC minutes themselves, that support for tightening extended well beyond the three officially dissenting presidents, and adds to the case that the Fed’s rate path remains genuinely contested rather than settled at a hold. For rate markets, this detail is unlikely to move pricing dramatically on its own since it reflects sentiment ahead of a meeting three weeks old, but it adds weight to the argument that Fed Chair Warsh faces real internal pressure to justify a continued hold when he speaks at Jackson Hole on Friday.
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The public FOMC vote showed three hawks, the discount rate minutes show there were at least four.
Summary:
- Minutes from the Federal Reserve Board’s discount rate meetings, released Tuesday, show directors at four of the Fed’s twelve regional banks voted to raise the primary credit rate by a quarter point ahead of July’s FOMC meeting
- The four banks were Dallas, Cleveland and Minneapolis, whose presidents Lorie Logan, Beth Hammack and Neel Kashkari also formally dissented at the July FOMC meeting, plus Kansas City
- Kansas City Fed President Jeff Schmid does not hold a vote on the federal funds rate this year, so his bank’s stance was not visible in the FOMC’s own minutes or vote tally
- The discount rate recommendations were overruled when the FOMC voted 9-3 to hold the federal funds rate at 3.5% to 3.75% at its July 28-29 meeting
- Regional Fed bank directors are not policymakers and do not set the Fed’s benchmark interest rate, but their views are shaped by regular meetings with their respective Fed presidents and can offer insight into those presidents’ thinking
- The discount rate is ultimately set by the Board of Governors to match the top of the federal funds target range, distinct from the FOMC’s own process for setting that target range
Minutes released Tuesday from the Federal Reserve Board’s discount rate meetings show that directors at four of the Fed’s twelve regional banks voted to raise the rate charged to commercial banks for emergency loans in the days before the central bank’s July policy meeting, adding a new layer of detail to an already contentious decision.
The boards of the Dallas, Cleveland and Minneapolis Fed banks, whose presidents Lorie Logan, Beth Hammack and Neel Kashkari each dissented at the July Federal Open Market Committee meeting in favour of a quarter point increase, voted for the same move on their institutions’ primary credit rate. They were joined by the board of the Kansas City Fed, whose president Jeff Schmid does not hold a vote on the federal funds rate this year and whose views were therefore not reflected in the FOMC’s own 9-3 vote tally or dissent record.
The discount rate process is separate from, though related to, the FOMC’s more closely watched federal funds rate decisions. The federal funds rate is the target range for overnight lending between banks, set by the FOMC and used as the Fed’s primary tool for influencing broader borrowing costs across the economy, including mortgages, credit cards and business loans. The discount rate, by contrast, is the rate the Fed charges when it lends directly to commercial banks through its discount window, typically used by banks facing short term liquidity needs. Each of the Fed’s twelve regional Reserve Banks has its own board of directors, and those boards meet regularly to recommend a discount rate to the Board of Governors in Washington. The Board of Governors then sets the actual discount rate, which is conventionally kept aligned with the top of the FOMC’s federal funds target range.
Regional bank directors are not monetary policymakers themselves and have no vote on the federal funds rate. However, they meet frequently with their respective Reserve Bank presidents, and those presidents have said in the past that directors’ views help inform their own thinking heading into FOMC meetings. In that sense, the discount rate votes offer a proxy for sentiment within individual regional banks that can sometimes run ahead of, or diverge from, what shows up in the public FOMC vote.
The July FOMC meeting itself produced the most fractured vote of the current cycle, with the committee ultimately holding the federal funds rate at 3.5% to 3.75% by a margin of 9 to 3. Minutes from that meeting, released separately last week, showed that support for tightening extended well beyond the three dissenting presidents, with many participants judging that policy tightening would likely be necessary if inflation failed to decline. Tuesday’s discount rate minutes reinforce that picture, showing that Kansas City’s board effectively aligned with the hawkish camp even though its president’s institutional vote was not up for consideration this year.
Since the July meeting, incoming data has complicated the outlook further, with nonfarm payrolls falling in July and core inflation readings coming in softer than expected, which had already pulled back market pricing for a September rate increase. The discount rate minutes add another data point to weigh as Fed Chair Kevin Warsh prepares to deliver his first Jackson Hole keynote address as chair on Friday, an appearance markets are watching closely for signs of where the balance of opinion inside the Fed currently sits.
This article was written by Eamonn Sheridan at investinglive.com.