Hawkish Fed pressure: four Reserve Banks sought a higher discount rate

The news

The Federal Reserve Board on August 25 released the minutes of its discount rate meetings of July 20 and July 29. They show a hawkish Fed signal from the regional level: directors at four Reserve Banks asked the Board to raise the primary credit rate to 4 percent from 3.75 percent. The Board took no action on the requests and approved the existing rate at both meetings.

Key takeaways:

• Cleveland and Minneapolis directors voted on July 16 for a 4 percent primary credit rate; Kansas City and Dallas directors joined them on July 23 after earlier votes to keep 3.75 percent.
• Ten Reserve Banks had initially asked to keep the rate unchanged at the July 20 meeting.
• On July 29 the Board kept the primary credit rate at 3.75 percent and the interest rate on reserve balances at 3.65 percent.
• The FOMC held the federal funds target range at 3-1/2 to 3-3/4 percent that day, effective July 30.

The Board’s release stresses that its process for setting the discount rate is separate from the one the FOMC follows in setting the federal funds target range. The discount rate, formally the primary credit rate, is what the Fed charges depository institutions that borrow through the discount window.

Our analysis

The minutes record a shift in the requests between the two meetings. On July 20, ten Banks had asked to keep the rate where it was and two, Cleveland and Minneapolis, had asked for an increase. By July 29, the Kansas City and Dallas directors, who had voted on July 9 to hold at 3.75 percent, had changed their votes to 4 percent on July 23. New York, Richmond and Atlanta directors voted on July 23 for 3.75 percent. The minutes of the later meeting do not restate the votes of the other Banks.

Reserve Bank directors reported conditions that explain some of the pressure. They described stable economic conditions, steady employment in most Districts and high credit availability with stable credit quality in commercial lending. Several noted elevated inflation and consumers becoming more price conscious, and most cited rising fuel prices and surcharges tied to global events. Most also highlighted continuing AI-related investment aimed at productivity and efficiency.

The Board’s response was uniform and brief. At both meetings, the minutes say, no sentiment was expressed for changing the primary credit rate. Seven members voted for the action at each meeting: Chairman Warsh, Vice Chair Jefferson, Vice Chair for Supervision Bowman and Governors Powell, Waller, Cook and Barr.

The mechanics matter for readers parsing signals. The primary credit rate of 3.75 percent equals the top of the federal funds range, and the Board approved keeping interest on reserve balances at 3.65 percent to support the FOMC’s decision. The secondary credit rate stays 50 basis points above the primary rate, and the seasonal credit rate continues to reset every two weeks from the average of the effective federal funds rate and the rate on three-month certificates of deposit, rounded to the nearest 5 basis points.

Room for disagreement

Discount rate requests are not votes on the policy rate. Reserve Bank boards of directors propose the primary credit rate, and the Board decides. Four requests for a higher rate are a data point about regional sentiment, but the Board’s own record shows no appetite to move, and the FOMC, not the discount window process, sets the target range.

There is also an alternative reading of the directors’ reports. Stable credit quality, strong credit availability and steady hiring describe an economy that is not stressed, which some could take as an argument for patience rather than tightening. The same reports mention elevated inflation and fuel costs, so the evidence cuts in both directions.

What to watch

• Whether the number of Reserve Banks requesting a higher primary credit rate grows when the next round of votes occurs.
• The next FOMC statement and the minutes of the July 28-29 meeting, already released, for how the Committee describes the inflation outlook.
• Fuel and energy prices, which directors cited repeatedly and which feed directly into headline inflation.
• The next set of Board discount rate minutes, typically released several weeks after each round of meetings.