Fed: Boston, Kansas City Banks At Odds on Discount Rate

WASHINGTON - In its latest minutes of Federal Reserve considerations of the interest rate charged commercial banks for discount window borrowing, the Fed Tuesday said it once again chose not to act on the opposite inclinations of the Kansas City and the Boston regional banks.

While most regional bank directors agreed with the Board on the existing 0.75% rate, some of the directors wanted a quarter-point higher rate, to move toward reestablishing the 100-basis point spread with the federal funds rate that existed before the financial crisis. Some wanted the Fed's primary rate to be lowered half a point, as a signal that existing accommodation should be amplified.

The arguments were summarized in the minutes, that said that although all directors by late July agreed economic activity "had slowed somewhat in recent months" that "most" still saw an improvement over the "medium term."

Yet "some expressed considerable uncertainty about the near-term prospects for economic growth."

"In labor markets, growth in employment was sluggish, and the elevated unemployment rate remained a source of concern," the minutes continued. "Directors reported solid increases in automobile sales, but overall consumer spending had decelerated somewhat."

Directors "also noted continued, though uneven, improvements in the housing sector that included a rise in home sales and prices in a number of areas." In addition. there were "potentially adverse effects from recent drought conditions in many regions" and other "ongoing downside risks, including still-significant strains in global financial markets and domestic fiscal uncertainty, as resulting in more caution on the part of firms regarding hiring and investment."

In the end, as they have since the crisis prompted a lowering of the discount rate to begin with, Chairman Ben Bernanke and six others on the Board decided to keep the rate as is.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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