Four regional Fed banks backed rate hike ahead of July decision, minutes show

Directors at four of the Federal Reserve's 12 regional banks backed an increase in the emergency lending rate charged to commercial banks in the days before the U.S. central bank's July policy meeting, highlighting the disagreement surrounding the decision to keep interest rates unchanged, Reuters reported.

Minutes from the regional banks' discount rate meetings, released Tuesday, showed that directors at the Dallas, Cleveland, Minneapolis and Kansas City Federal Reserve banks recommended raising the primary credit rate by a quarter of a percentage point.

The recommendations came ahead of the Federal Reserve's July 28-29 policy meeting, where policymakers voted 9-3 to maintain the benchmark interest rate. According to Reuters, the regional banks' recommendations offer a fresh indication of the debate within the Fed system over the appropriate path for monetary policy.


The three regional banks whose directors supported the increase in Cleveland, Dallas and Minneapolis were also represented by Fed presidents who dissented from the July policy decision. The Kansas City Fed also backed the increase, although its president, Jeff Schmid, does not hold a vote on the policy-setting Federal Open Market Committee this year.

Directors Have Influence but Do Not Set Policy

Regional Federal Reserve bank directors do not directly determine U.S. monetary policy. However, they regularly meet with their respective Fed presidents, and their assessments of economic conditions can contribute to the views presented by those officials at policy meetings.

The discount rate is set through a separate process from the federal funds rate. Regional Fed bank boards vote on recommendations for the rate during their regular meetings, after which the Federal Reserve Board in Washington ultimately establishes the rate.

Discount Rate Tracks Top of Policy Range

The primary credit rate is generally aligned with the upper end of the Federal Reserve's target range for the federal funds rate. The policy range has stood at 3.5% to 3.75% since December.

The recommendations for a higher discount rate therefore provide another indication that some officials and regional bank directors saw sufficient reasons for tighter policy even as the broader Federal Reserve continued to hold rates steady.

The split comes as Fed officials weigh competing risks, including inflation that remains above the central bank's longer-term objective and signs of weakness in parts of the U.S. economy. The disagreement over the July decision has increased attention on the outlook for future rate moves and the balance between inflation risks and economic growth.

Reuters reported that the discount rate meeting records offer additional insight into the regional Federal Reserve system's internal debate at a time when investors are closely watching policymakers for clues about the next direction of interest rates.

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