The periodic message the directors of the Philadelphia, Kansas City and Dallas Federal Reserve Banks send to Washington – raise rates – was disregarded in June at Fed headquarters, as their requests for a higher rate of interest for discount window borrowing was routinely denied, the Fed said Monday.
As markets try to figure out whether Fed Chair Janet Yellen’s basic message is that rates will be low for longer, or low for not much longer, the regional bank directors use the discount rate requests as a way to send their own wish list to the Fed Board. As has been the case through the year so far, nine regional bank boards have told the Fed to hold fast and not “normalize” the rate structure.
Yellen will make the Fed’s semi-annual report to Congress Tuesday and Wednesday mornings with the most pointed questions expected in Wednesday’s Republican-led Financial Services Committee session on the House side.
The dissenters have been the regional banks of Philadelphia, Kansas City and Dallas. Again in June, they “favored a move toward normalization of the primary credit rate in light of their outlook for economic and financial conditions, as well as their assessments to the risk to that outlook,” the Fed’s minutes of the discount rate considerations said.
And again, as has been the case in the seven years since the relationship was altered between the discount rate for banks borrowing from the Fed and for overnight borrowings among domestic and foreign banks in the fed funds market the Fed Board members expressed “no sentiment” to make any changes. In the latest consideration, the Board included newly sworn in members Vice Chairman Stanley Fischer and Gov. Lael Brainard. Otherwise the Board considered of Chair Janet Yellen Governors Daniel Tarullo and Jeremy Powell.
The spread between the Fed’s federal funds rate target and the rate at the discount window has been a quarter point since February 2010 and is unlikely to be widened to what used to be normal, before the financial crisis, of 0.75% until the Federal Open Market Committee begins to raise rates.
As has been the case for more than seven years, it remains extremely unlikely the Fed board will authorize any requests to restore the historical relationship between the discount rate and the federal funds rate until the Federal Open Market Committee decides to begin raising the target federal funds rate.
But the periodic votes on the discount rate give regional banks an opportunity to voice their leanings on the Fed’s rate structure. The spread between the discount rate and the federal funds rate was first reduced to 50 basis points in August 2007 and further reduced to 25 basis points in March 2008 before being increased to 50 basis points in February 2010.
Those regional bank directors who wanted to keep the current rate structure “noted ongoing improvements in economic activity, and most directors expected the economy to continue expanding at a moderate pace,” the discount rate minutes said.
“Consumer spending remained on a moderately upward trend, particularly in large metropolitan areas and at higher-end retailers” and “many directors also described manufacturing as either holding steady or picking up gradually,” the minutes said. “Housing market activity was generally slow, although some areas reported increased activity and “labor markets showed further signs of improvement.”
Most firms were “still cautious about hiring, and the unemployment rate remained elevated,” the directors told the Fed Board. “Directors generally did not report an increase in price pressures or note a change in longer-term inflation expectations, which had remained stable.”
Under law, discount rates for overnight Fed lending to commercial banks are established by each Reserve Bank’s board of directors, but subject to the review and determination of the Board of Governors.