By Steven K. Beckner

(MNI) – Directors of two Federal Reserve Banks sought a 25 basis
point increase in the primary credit rate at which financial
institutions borrow through the Fed’s discount window in January,
Federal Reserve Board minutes released Tuesday show.

The directors of the Dallas and Kansas City Federal Reserve Banks,
as they have several times in the past, wanted to widen the spread
between the federal funds rate target and the primary credit discount
rate from 50 basis points to 75 basis points as a “move toward
normalization,” according to the minutes.

However, most FRB directors continued to support maintaining the
prevailing 75 basis point primary credit rate, the rate at which banks
borrow for the very short-term.

And the minutes show that there was no sentiment on the Board of
Governors to increase the Fed’s penalty lending rate.

The primary credit rate, better known as the discount rate, has
been held at 50 basis points above the upper end of the federal funds
target range of 0 to 25 basis points since Feb. 19, 2010.

The discount-funds rate spread had previously been held at 25 basis
points since December 2008. It had been slashed to that level as the
mortgage crisis worsened from a pre-crisis spread, or penalty borrowing
premium, of 100 basis points.

The Board widened the spread back out to 50 basis points last
February because it decided there had been “continued improvement in
financial market conditions.”

At the time some Fed watchers thought it might be the first step
toward implementing an exit strategy, but when the economy took a turn
for the worse, the Fed not only refrained from exiting, it launched a
new round of quantitative easing later in the year.

Reflecting the views of presidents Richard Fisher and Thomas
Hoenig, directors of the Dallas and Kansas City Feds thought last month
it was time to widen the spread by another 25 basis points. As they had
last December, they voted on Jan. 13 to seek a further widening of the
spread to 75 basis points, which would have taken the primary credit
rate to 1%.

“As another step toward restoring a pre-crisis discount rate
structure, some directors supported increasing the primary credit rate
by 25 basis points (to 1 percent) at this time,” the minutes say.
“These directors favored a move toward normalization of the primary
credit rate in light of current and anticipated economic conditions.”

But in a Jan. 24 meeting, the Board voted to keep the discount rate
at 75 basis points, and the minutes say, “No sentiment was expressed for
changing the primary credit rate.”

Two days later the Federal Open Market Committee voted to keep the
funds rate unchanged at zero to 25 basis points.

Directors of other Federal Reserve Banks, including notably
Philadelphia and Richmond, preferred keeping the rate structure
unchanged out of continued concern about high unemployment and low
inflation.

“Federal Reserve Bank directors noted positive economic
developments, including a pickup in consumer sales at the end of last
year and improvements in the manufacturing sector,” say the minutes.

However, the minutes add, “While the incoming data provided greater
confidence that the recovery will be sustained, many directors remained
cautious about the outlook.”

“Unemployment was still higher than desired, and job creation
remained sluggish,” the minutes elaborate. “The housing sector continued
to struggle, and some directors attributed the persistent downward
pressure on home prices to still-increasing foreclosures.”

“Some directors expected retailers to continue to manage their
inventory levels conservatively,” they continue. “Although increases in
certain prices, including those for agricultural products, metals, and
petroleum-based commodities, were noted, most directors expected
inflation to remain quite low.”

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

** Market News International **

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