A slight tilt toward a firmer monetary policy – or at least less sentiment for additional monetary stimulus – is revealed in minutes of the latest Federal Reserve Board meeting on the setting of interest rates charged at the Fed’s discount window, released Tuesday.
While directors of the same three Federal Reserve Banks sought an increase in the primary credit rate, directors of a Bank that had been seeking a cut in that discount rate instead sought no change in the rate at which banks borrow from the Fed on a short-term basis.
At its Jan. 27 meeting, held immediately before a Federal Open Market Committee meeting, the Federal Reserve Board voted to keep the primary credit rate at 75 basis points – 50 bps above the upper end of the federal funds rate target range of zero to 25 bps.
In November and December, directors of the Minneapolis Fed had requested a cut in the primary credit rate to 50 bps, which would have meant a narrowing of the discount-funds rate spread to 25 bps.
The Board voted that down, as it did three requests for a rate hike.
Once again, the directors of the Dallas, Kansas City and Philadelphia Federal Reserve Banks proposed an increase in the primary credit rate to 1%, which would have meant an increase in the discount-funds rate spread to 75 from 50 bps.
“As another step toward restoring a pre-crisis discount rate structure, some directors supported increasing the primary credit rate by 25 basis points (to 1 percent) at this time” to create “a 75-basis-point spread,” the minutes say.
The minutes reflect much the same upbeat outlook on the economy among Federal Reserve Bank directors as was expressed at the FOMC meeting. But it was not seen as upbeat enough to justify a higher Fed lending rate.
“Federal Reserve Bank directors had mostly positive reports on recent economic activity and were generally optimistic that the economy would continue to expand at a moderate pace,” they say.
“Some directors cited strength in the auto and agricultural sectors,” the minutes said. “Other directors reported that activity in the housing sector had generally remained near recent levels.”
“Directors’ comments on consumer spending, including holiday sales, were mixed,” they add.
“While labor market conditions had improved, the unemployment rate was still elevated and hiring activity was described as modest,” the minutes reported. “Wage pressures generally remained muted, although a number of directors reported that there were difficulties in finding qualified workers for some positions.”
The minutes say “concerns about fiscal policy had diminished, but some directors noted that increased health care costs could have negative effects on hiring and economic activity.”
“Although recent inflation readings were lower than the Federal Open Market Committee’s longer-run goal, directors did not note a change in longer-term inflation expectations, which had remained stable,” they conclude. “Against this backdrop, most directors recommended that the current primary credit rate be maintained.”