UPDATE 1-Two Fed banks wanted discount rate hike in mid-Jan
(Updates with details, background)
By Pedro Nicolaci da Costa
WASHINGTON Feb 23 (Reuters) - Two regional Federal Reserve banks led by more hawkish policymakers began a push to raise the discount rate for Fed emergency bank loans in mid-January, according to minutes of a Fed board meeting released on Tuesday.
The Kansas City and St. Louis Federal Reserve banks were the first to call for the rate hike that was ultimately implemented last week, minutes of the Jan. 25 meeting showed.
When the Fed's policy-setting Federal Open Market Committee met on Jan. 26-27, only those two banks called for raising the rate the Fed charges on emergency loans to banks.
"In light of improving conditions in financial markets, some Federal Reserve Bank directors indicated that they favored increasing the primary credit rate by 25 basis points in order to begin to restore a more normal discount rate structure," the minutes said.
The Fed has maintained that its move on Thursday, which pushed the so-called primary credit rate up to 0.75 percent from 0.50 percent, should not be interpreted as the opening salvo of a monetary policy tightening cycle.
The timing of the rate hike came as a surprise to financial markets. While the discount rate normally moves in tandem with the federal funds rate governing interbank lending, Fed officials wanted to make the change between policy meetings to distinguish between liquidity programs and monetary policy.
By the time the rate increase was announced, all 12 regional Fed banks had requested a discount rate increase.
In raising the discount rate, the U.S. central bank indicated it remained committed to keeping the benchmark overnight federal funds rate, its main policy tool, exceptionally low for an extended period of time. That rate remains in a zero to 0.25 percent range.
That the push for a higher discount rate was led by some of the more hawkish regional Fed banks could prompt some investors to second-guess other reassurances on the main policy rate.
It was Kansas City Fed President Thomas Hoenig who, upon rotating back into a voting seat at the Fed's January policy meeting, dissented against the central bank's vow to hold the federal funds rate extraordinarily low for an "extended period" in favor of less explicit language.
Hoenig has said the phrase was devised to grapple with emergency conditions that are no longer in place.
While the FOMC sets the target for the federal funds rate, the Fed's Washington-based board decides when to move the discount rate, acting on requests from the regional Fed banks boards of directors. (Additional reporting by Mark Felsenthal; Editing by James Dalgleish and Padraic Cassidy)
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