–Retransmitting Story Headlined 14:00 ET Tuesday

By Steven K. Beckner

(MNI) – Two Federal Reserve Banks sought a 25 basis-point increase
in the Fed’s “primary credit” discount rate to widen its spread with the
federal funds rate at April Federal Reserve Board meetings, minutes of
the meetings released Tuesday show.

But while some Federal Reserve Bank directors saw “upside risks” to
inflation, most thought the rise in inflation would prove transitory and
remained concerned about downside risks to growth and about high
unemployment.

The boards of directors of the Dallas and Kansas City Federal
Reserve Banks voted on March 24 to request an increase in the primary
credit rate, at which depository institutions can borrow short-term from
the Fed’s discount window at a penalty rate, by 25 basis points to 1%.

Had the Board of Governors approved the request, it would have
widened the spread between the primary credit rate and the upper end of
the Federal Open Market Committee’s federal funds rate from 50 to 75
basis points. The minutes say the directors who wanted to widen the
spread “favored a move toward normalization of the primary credit rate
in light of current and anticipated economic conditions.”

But 10 of the 12 Federal Reserve Banks wanted to keep the primary
credit rate at 75 basis points, and the minutes say there was “no
sentiment” on the Board to raise the rate in advance of the April 26-27
FOMC meeting.

The discount rate minutes from April 25 reflect much the same
consensus about the balance of risks to growth and inflation that was
evident in the recently released FOMC minutes. In short, there was
greater concern about high unemployment than about higher inflation.

“Federal Reserve Bank directors generally noted that although the
economic recovery was progressing, they were cautious about the economic
outlook,” say the minutes.

“Some directors reported increases in consumer and business
spending; gains were also noted in the manufacturing and agricultural
sectors,” they continue. “Labor market conditions had continued to
improve modestly, although many directors said unemployment was still
higher than desired.”

“The housing sector remained weak, and some directors noted that
recent housing starts were lower than anticipated,” the minutes go on.
“Other directors pointed to considerable slack remaining in the economy
and ongoing downside risks to the economic outlook. Those risks included
rising commodity and energy prices, which had the potential to dampen
consumer spending, and increased fiscal stringency at all levels of
government.”

The minutes note that “higher energy and other commodity prices had
recently pushed up inflation,” but report that “this increase was
generally not expected to be sustained, although a number of directors
saw upside risks to the inflation outlook.”

“Against this backdrop, most directors recommended that the current
accommodative stance of monetary policy be maintained.”

** Market News International **

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