Dallas, KC, Chicago Feds sought discount rate hike

WASHINGTON Tue Sep 2, 2008 3:23pm EDT

Federal Reserve Chairman Ben Bernanke (fourth from top at left) with the Board of Governors during a Federal Open Market Committee meeting in a file photo. REUTERS/Federal Reserve/Handout

Federal Reserve Chairman Ben Bernanke (fourth from top at left) with the Board of Governors during a Federal Open Market Committee meeting in a file photo.

Credit: Reuters/Federal Reserve/Handout

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WASHINGTON (Reuters) - Directors at the Federal Reserve Banks of Kansas City, Dallas and Chicago sought quarter percentage-point hikes in the discount rate before an August 5 policy meeting to keep inflation at bay, Fed documents released on Tuesday showed.

Directors at the other nine regional Fed banks all voted to hold the discount rate steady at 2.25 percent in the same period leading up to the Fed's most recent interest rate-setting meeting, according to minutes of discount rate meetings released by the Federal Reserve Board in Washington.

The August 5 meeting ended with Fed policy-makers holding the benchmark overnight funds rate unchanged at 2 percent. The Fed board kept the discount rate, the rate charged to banks for direct loans from the Fed discount window, unchanged at 2.25 percent.

The minutes of the Fed board's discount rate meetings showed that Dallas and Kansas City banks sought hikes on June 26, July 10 and July 24. The Chicago Fed directors voted to hold rates steady on the first two of these dates, but shifted its stance to seek a rate hike on July 24.

Dallas Fed Bank President Richard Fisher dissented against the decision to hold the federal funds rate at 2 percent because he preferred an increase. Kansas City Fed President Thomas Hoenig is not a voting member of the policy committee this year but has consistently voiced concerns about the need to combat inflationary expectations.

The Dallas and Kansas City Feds were the only Fed banks to seek a discount rate increase ahead of the June 24-25 Federal Open Market Committee meeting, which also left rates unchanged.

Chicago Fed President Charles Evans is not currently a voting member of the FOMC but will become one in 2009.

Regional Fed directors recommending a 25-basis-point increase in the discount rate before August 5 meeting agreed that economic activity was soft and financial markets were not yet stabilized, but they expressed greater concerns about inflationary expectations, according to the minutes.

"They cited indications that higher input costs were being passed through to product prices and that inflation expectations had risen and judged that the upside risks to inflation were of greater concern than the downside risks to growth," the Fed said in the minutes.

Regional Fed directors in favor of holding rates steady expressed concerns about inflation, but judged the current stance of monetary policy was appropriate, given downside risks to growth, the minutes said. "They 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," the Fed said.

(Reporting by David Lawder)

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