Fed banks were split over Oct discount rate: minutes

WASHINGTON (Reuters) - The regional Federal Reserve banks were split on whether to cut the discount rate ahead of the Fed's October 30-31 policy meeting amid conflicting views about the spillover effects of the housing downturn.

Minutes released on Tuesday of the Washington-based Federal Reserve Board, which must approve changes to the discount rate, showed that five banks initially sought a quarter-percentage point cut in the rate to 5 percent, while seven banks wanted to keep the rate steady at 5.25 percent.

The New York Fed Bank, at first one of those seeking a steady discount rate, changed its request on October 30 to seek a quarter-point cut.

The discount rate governs direct emergency loans to banks and was cut by a half point in a move on August 17 to calm markets and boost liquidity to the banking system as mounting subprime mortgage losses roiled investors.

Regional Fed bank directors in favor of a 25-basis-point cut noted that the correction in the housing sector had intensified since mid-September, "increasing concerns about the potential for spillover into consumer spending going forward," the minutes said.

"Under these circumstances, the directors considered a further easing now to be an appropriately preemptive approach to downside risks to economic growth," the Fed said, noting they also viewed market conditions, while improved from September, as not yet normal.

The Fed bank directors in favor of maintaining the current rate noted that downside risks to the real economy remained, notably in the housing sector, the Fed minutes said.

But these directors assessed incoming economic data as positive overall and they saw financial markets as gradually improving, underpinning their expectations for moderate economic growth and moderate inflation. "In view of last month's (September's) easing of monetary policy, these directors preferred to maintain the current primary credit rate for now and closely monitor incoming data for evolving risks to growth and inflation," the minutes said.

The Fed board chose not to alter the discount rate at a meeting on October 29. It cut the rate to 5 percent on October 31, the same day as policy-setting Federal Open Market Committee lowered the target federal funds rate by 25 basis points to 4.5 percent.

(Reporting by David Lawder; Editing by Neil Stempleman)