Hawkish Fed: Discount Rate Minutes Show Banks Pushed a Hike

The news

The Federal Reserve Board on Tuesday released minutes of three meetings at which it reviewed the discount rate, held on August 17, September 9 and September 16. Read together, they show a hawkish Fed taking shape from the bottom up: the number of Reserve Banks asking for a higher primary credit rate went from two in August to four in early September and then to seven by the time the Federal Open Market Committee raised the federal funds rate.

• On August 17, two of the twelve Reserve Banks (Kansas City and Cleveland) asked for a 4 percent primary credit rate. The other ten wanted to hold at 3.75 percent.
• On September 9, four banks (Cleveland, Chicago, Minneapolis and Kansas City) requested 4 percent, while eight wanted to stay at 3.75 percent.
• On September 16, the Board raised the primary credit rate to 4 percent, effective September 17, alongside the FOMC’s quarter-point increase to a target range of 3-3/4 to 4 percent.

The Board stated that its process for setting the discount rate is distinct from the one the FOMC follows in setting the federal funds target range.

Our analysis

The August minutes record that the Board expressed no sentiment for changing the rate and approved 3.75 percent as requested by ten banks. The September 9 minutes repeat that outcome with a larger group of banks requesting an increase. In both cases the Board took no action on the higher requests, and the September 9 record says members discussed their individual assessments only “on a preliminary basis” because the rate and its communication would be settled at the joint meeting with the FOMC the following week.

That sequencing matters for readers trying to gauge the committee’s thinking. The Board did not move on the Reserve Bank requests until the FOMC had decided. On September 16 it approved the increase and described a consensus for a 25-basis-point move. Seven Reserve Bank boards had voted for 4 percent by then: Cleveland, Chicago and Minneapolis on September 3, and Richmond, Atlanta, Kansas City and Dallas on September 10. The remaining five (Boston, New York, Philadelphia, St. Louis and San Francisco) were informed afterward of the Board’s approval of their establishing a 4 percent rate.

The September 9 minutes also carry the directors’ read on the economy. They described conditions as stable and the labor market as generally stable, with adequate labor supply and moderate wage pressures. Hiring difficulties and elevated wages for some skilled positions persisted in most Districts, including jobs tied to firms’ artificial intelligence strategies and data center construction. Most directors saw input cost pressures from several sources: oil and fuel prices, tariffs, rising healthcare costs, and competition for resources and supplies with the AI buildout.

For anyone following the hawkish Fed narrative, that is the same set of cost pressures the FOMC statement of September 16 pointed to when it said inflation “remains elevated” and that the Committee “will deliver price stability.” The decision was unanimous at 12-0 on the FOMC side. On the Board side, all seven governors voted for the discount rate action on September 16, while attendance was thinner on earlier dates: Jefferson was absent on August 17, and Waller and Cook were absent on September 9.

Room for disagreement

The requests are not a vote on the FOMC’s decision. Reserve Bank directors set their proposed discount rates based on their own conversations with business contacts, and a request to raise the rate says little about how the committee itself weighed a hike. Because the Board declined to act ahead of the FOMC, the minutes may also show deference to the committee’s timetable more than any internal split.

A second reading is that the early requests carry some signal. When four banks, a third of the System, ask for a higher rate days before a meeting, and three more join them within a week, the pattern points to a shared view in those Districts that a higher rate was warranted. The minutes do not say which reading the Board itself took.

What to watch

The Federal Open Market Committee meets next on October 27-28. The Board will hold more discount rate meetings after that, and the minutes of those sessions, released with a lag, will show whether Reserve Bank directors request further changes. In the cycle just recorded, the Board acted only alongside the FOMC, so the committee’s decision remains the one to watch.