Two Fed banks still wanted discount rate hike in June

Two regional Federal Reserve banks, Kansas City and Dallas, last month continued to push for an increase in the rate the central bank charges banks for emergency loans, according to meeting minutes released on Tuesday.

The Fed has kept the discount rate unchanged at 0.75 percent since February, when it raised the rate by a quarter percentage point. Directors of the Kansas City and Dallas Fed boards requested an increase to 1 percent in June, while St. Louis Fed board members dropped earlier calls for an increase.

Minutes of meetings of the Fed's Washington board, which needs to approve any requests to change the discount rate, showed regional Fed directors remained cautious on the economic outlook, even though some wanted to bump the discount rate higher.

Although the labor market showed signs of gradual improvement, directors generally expected hiring to remain subdued, the minutes said. Directors also expressed concerns about downside risks posed by the fiscal condition of state and local governments and by financial developments abroad.

When the Fed's policy-setting Federal Open Market Committee met on June 22-23, it decided to hold the federal funds rate, the central bank's main policy tool, in a zero to 0.25 percent range. At the same time, the Fed's Washington board decided to make no change in the discount rate, which normally moves in tandem with the federal funds rate.

Before the credit crisis struck in 2007, the spread between the two rates was a full percentage point. There is internal disagreement at the Fed as to whether that gap should be returned to that level, a debate that has likely taken on new importance given a recent weakening in the economic data.

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 meeting minutes said.

Softer economic activity has driven analysts to push back the timing of any hike in the benchmark federal funds rate well into next year. There has even been growing speculation that the Fed would have to ease monetary policy further, perhaps by adding to a program of mortgage-linked and Treasury debt purchases that already totals more than $1.5 trillion.

Fed Chairman Ben Bernanke is expected to shed more light on the matter on Wednesday and Thursday as he goes to Capitol Hill to deliver testimony on the central bank's semi-annual monetary policy report.