By Denny Gulino

WASHINGTON (MNI) – Only one Federal Reserve regional bank, Dallas,
pushed headquarters to raise the discount rate another notch, the
Board’s minutes of a March 15 meeting showed Tuesday.

Directors of the Dallas Bank voted March 11 to take the discount
rate to a full 1% from the 0.75%, echoing the quarter-point increase
which the Fed had applied to the discount rate Feb. 17 and announced the
next day.

However, on March 15, considering the Dallas request and the fact
the other banks were satisfied with the existing rate, the Board
routinely renewed the status quo. “No sentiment was expressed for
changing the primary credit rate before the Committee’s meeting and the
existing rate was maintained,” the minutes said.

In discussing the discount rate March 15, the Board members
reviewed comments from Federal Reserve Bank directors portraying “recent
information on economic activity as mixed.”

Some comments suggested “a modest recovery was under way” while
other data “raised questions about its sustainability.”

“Some directors noted improved year-over-year performance in
several sectors, but they also observed that business conditions
remained fairly weak,” the minutes related. “As a result, businesses
continued to be cautious about their capital spending and hiring plans.
Although layoffs had declined, there was little indication that
significant hiring had resumed, and labor markets were generally
regarded as flat.”

Among other negatives noted, “Substantial slack in resource
utilization continued to restrain cost pressures and inflation” and
“Given the outlook for a gradual recovery and persistent downside risks,
and with inflation moderate and inflation expectations stable, most
directors agreed that the current accommodative stance of monetary
policy remained appropriate.”

The February increase had been interpreted by many in the markets
as at least a small beginning to a tightening phase, despite the Fed’s
declaration at the time that the intent was only to eventually return to
normal the spread between the discount rate and the fed funds rate as it
had existed before the financial crisis.

And when the routine Board review of discount rate views among the
regional banks again showed up as an agenda item for a routine Board
meeting last week, once again many market participants went on alert for
another move and said it would have the same tightening implication.

Some analysts said despite Board protestations to the contrary, the
Feb. 18 hike in the discount rate could indeed be discerned more
generally by an increase in the effective funds rate of a few basis
points.

The Board can move on the discount rate at any time, with or
without a consensus among the directors of the regional banks.

As the Board noted in its minutes of its Feb. 17 meeting which led
to the Feb. 18 announcement of a discount rate increase, “The spread
between the primary credit rate and the committee’s target federal funds
rate had been 100 basis points before the financial crisis and widening
the spread would be consistent with other steps being taken by the
Federal Reserve to normalize its lending programs as financial
conditions improved.”

** Market News International Washington Bureau: 202-371-2121 **

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