By Steven K. Beckner

(MNI) – Despite heightened concern and uncertainty about the
economic outlook among Federal Reserve Bank directors, directors of two
Banks again sought to increase the discount rate in August and
September, minutes of Federal Reserve Board meetings released Tuesday
show.

The Dallas and Kansas City Federal Reserve Banks submitted requests
to the Board to increase the primary credit rate, at which banks borrow
short-term from the discount window, from 75 basis points to 1%.

The other 10 banks wanted to keep the primary credit rate at 75
basis points.

That proposed 25 basis point increase would have had the effect of
widening the spread between the federal funds rate and the penalty
discount rate from 50 to 75 basis points.

Those favoring the wider spread saw it as “another step toward
restoring a pre-crisis discount rate structure,” the minutes say. The
spread was widened from 25 to 50 basis points in February 2010 because
the Board decided there had been “continued improvement in financial
market conditions.”

As it has repeatedly since, the Board of Governors rejected the
request by Dallas and Kansas City to raise the rate and widen the spread
at three meetings in August and September, most recently the Sept. 19
meeting that proceeded a meeting of the Fed’s funds rate-setting Federal
Open Market Committee.

On each occasion, all five members of the Board voted to keep the
discount rate at 75 basis points and the spread at 50 basis points.

Anticipating the tone of the Sept. 21 policy statement, the minutes
show that Federal Reserve Bank directors were anxious about the economy
and uncertain about its future.

“Federal Reserve Bank directors remained cautious about the
prospects for economic growth in light of generally weak incoming data
on employment and production,” the minutes say. “Although some directors
reported improvements in certain sectors, particularly those related to
energy or motor vehicles, most directors described overall economic
activity as moderate or flat, and many saw the outlook as unusually
uncertain.”

“Several directors cited heightened caution and restraint by
consumers and businesses as a result of recent volatility in stock
prices, continued uncertainty about European and U.S. fiscal matters,
and concern about general economic conditions,” the minutes continue.

“Directors also noted the ongoing drag on the economy from sluggish
employment growth and the stilldepressed housing sector,” they add.

“Higher prices for energy and other commodities pushed up inflation
earlier this year, but these prices had subsequently receded or leveled
off,” the minutes go on to say. “Longer-term inflation expectations had
remained stable. Against this backdrop, most directors recommended that
the current primary credit rate be maintained.”

** Market News International **

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