Fed discussed second discount rate hike: minutes

WASHINGTON (BestGrowthStock) – U.S. Federal Reserve officials discussed raising for a second time the interest rate charged on emergency loans to banks, according to minutes from a mid-March meeting released on Tuesday.

The central bank announced on February 18 that it was raising the discount rate to 0.75 percent from 0.5 percent, a move it described at the time as an acknowledgment financial markets were healing and the Fed’s emergency loans were less needed.

The minutes show that some directors wanted another discount rate hike, to 1 percent, less than one month later.

“Some directors favored taking a further step at this time toward the discount rate structure that existed before the crisis,” the central bank said. “These directors favored increasing the primary credit rate by 25 basis points…”

The central bank has taken great pains to differentiate between the discount rate and its benchmark federal funds rate, which it has kept near zero since December 2008. Officials have said hiking the discount rate should not be considered a tightening of monetary policy and would not increase borrowing costs for consumers or companies.

Investors are on edge for any hint that the central bank is poised to raise its benchmark rate. February’s discount hike had taken many by surprise, sparking concerns that tightening may be imminent.

However, the minutes showed the Fed still had concerns about whether the economic recovery was sustainable, and most directors agreed that “the current accommodative stance of monetary policy remained appropriate.”

They described the labor market as “flat,” saying that although layoffs had declined, there was little indication that significant hiring had resumed and businesses remained cautious about capital spending and hiring.

Before the financial crisis exploded in 2007, the discount rate was normally a full percentage point above the benchmark rate, known as the federal funds rate. However, the spread narrowed to a half-point after the Fed cut the discount rate in August 2007.

If the Fed had hiked the discount rate a second time, the spread would have moved to 0.75 percentage points from the high end of the Fed’s current target range of zero to 0.25 percent, which would still leave it slightly narrower than it was before the financial crisis.

The officials agreed to discuss the discount rate at the March 16 policy-setting meeting, but did not change it.

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(Reporting by Emily Kaiser, Editing by Chizu Nomiyama)

Fed discussed second discount rate hike: minutes