Fed Directors Divided on Rates Before December FOMC Meeting

Directors at the Federal Reserve system’s 12 regional banks were divided on the appropriate level of the discount rate in the weeks prior to the Dec. 18 meeting of the central bank’s monetary policy committee.

Directors in Minneapolis voted to cut the rate by a quarter percentage point to 0.5 percent in early December, while directors in Kansas City, Philadelphia and Dallas voted to increase the rate a quarter-point to 1 percent. Directors at the remaining banks voted to leave the rate unchanged, and the Fed Board expressed “no sentiment” in favor of changing it, according to minutes released by the Fed today in Washington.

Reserve bank directors offered “generally positive reports on recent economic activity,” the minutes said, and were “cautiously optimistic” about the prospects for growth. The directors’ votes on the discount rate, the rate at which banks can borrow directly from the Fed, serve as a signal to the Federal Open Market Committee on the federal funds rate, the main policy rate.

The minutes said those directors favoring a cut in the rate “believed that a lower setting would help to foster the committee’s macroeconomic objectives of maximum employment and price stability.” Those favoring an increase wanted a higher spread of the discount rate over the federal funds rate, the minutes said.

Policy makers voted to trim the Fed’s monthly bond purchases to $75 billion from $85 billion on Dec. 18, taking the first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.

The benchmark federal funds rate has been in a range of zero to 0.25 percent since December 2008, and officials said last month that it would remain around those levels so long as the unemployment rate remained above 6.5 percent and inflation forecasts didn’t exceed 2.5 percent.

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To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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