FYI ...   Tuesday - Sep  2,  2008

The Federal Reserve Board released today its minutes of Board meetings to review discount rate requests by regional Fed banks over the July 7 through August 5, 2008 period. The minutes show increasing concern at some regional Fed banks that monetary policy is too loose, showing displeasure by asking for an increase in the discount rate. While not all regional Fed presidents vote at each FOMC meeting on the fed funds target rate, all regional Feds must make a request regarding the discount rate at least once every two weeks, based on statutory requirements. The minutes noted that the board of directors of the Kansas City and Dallas Fed had voted on June 26, 2008 to raise the discount rate to 2-1/2 percent from 2-1/4 percent. At the same time, ten regional Feds asked for no change in the discount rate. The Board of Governors denied the rate increases. The same two regional Feds again requested the same increase on July 10, 2008. The Board of Governors denied these requests. But on July 24, the Chicago Fed's directors joined those from Dallas and Kansas City, adding to the chorus to raise the discount rate to 2-1/2 percent. The Board of Governors denied the three bank request to boost the discount rate. The regional banks wanting a higher discount rate pointed to higher input prices and rising inflation expectations as reasons for the increase. "Federal Reserve Bank directors recommending a 25-basis-point increase in the primary credit rate agreed that real economic activity continued to be soft and that financial markets had not yet fully stabilized. However, 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." Those opposed to an increase in the discount rate cited continuing stress in the financial markets and weaker economic growth as reasons for standing pat. But they also noted that there are upside risks for inflation. "Federal Reserve Bank directors in favor of maintaining the existing primary credit rate expressed continued concern about the near-term economic outlook. 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. However, they also noted that higher energy and food prices could pass through to core inflation measures. These directors concluded that the current stance of monetary policy achieved the appropriate balance between downside risks to growth and upside risks to inflation, and they preferred for now to monitor incoming information on the economy, financial markets, and inflation." The bottom line is that the internal debate within the Fed over the direction of policy is getting hotter and that more regional banks are tilting toward concern over rising inflation. -- R. Mark Rogers