Goldman Sachs: There's Another Set of Meetings Fed Watchers Should Be Paying Attention To

Do a discount double-check.

Reading the Signs: Breaking Down Central Bank Moves

There's no shortage of coverage and discussion of what will happen on Dec. 16, when the Federal Reserve is widely expected to raise interest rates for the first time in nearly a decade.

The votes held every other week on whether one of the lower-profile policy rates set by the Federal Reserve should be changed, however, typically receive little fanfare but ought not be ignored, according to analysts at Goldman Sachs.

Members of the board of governors of district Fed banks can request alterations to the deposit rate, which is what the central bank charges for any short-term loans it provides to depository institutions that are in good shape but were unable to procure funds from their peers. Ultimately, the board of governors in Washington has the final say on whether to approve or deny these requests.

The results of these meetings are neither binding nor an infallible indicator of what the central bank will do next, write economists Zach Pandl and Chris Mischaikow, but "discount rate requests do serve as a barometer of policy sentiment within the Federal Reserve System, and can be a useful complement to the policy guidance in other public communication."

The most recent minutes available showed nine regional Federal Reserve banks voted to raise the discount rate by 25 basis points, with officials in New York and Chicago preferring to keep the deposit rate at 0.75 percent and the Minneapolis Fed calling for a reduction.

"Recent discount rate requests point to broad-based support for a rate increase among the Reserve Banks," wrote Pandl and Mischaikow. "The last time nine or more Reserve Banks voted for a discount rate increase was in June 2006—the month of the final hike in the last tightening cycle."

A renewed focus on these requests is appropriate, the duo argue, as investors have been scouring all tea leaves at their disposal to get a better handle on the evolution of monetary policy.

"Although the discount rate vote of the regional boards and the FOMC votes of the bank presidents are distinct decisions, in practice there is a close correspondence between the two," wrote Pandl and Mischaikow.

While the relationship between rejected discount rate requests and dissents at meetings of the Federal Open Market Committee might not be the most potent, from a reading of these charts, the direction is both clear and intuitive:

Goldman Sachs

"In effect, discount rate requests can indicate the monetary policy preferences of the Reserve Banks and their presidents," Pandl and Mischaikow assert.

The hunger for higher rates among Fed presidents is prevalent now and is poised to become even more so in 2016. Goldman notes that three of the four regional banks whose presidents serve as voting members of the FOMC this year support a discount rate bump, compared with the request for an increase from all four of the regional banks whose presidents become voting members in 2016.

The discount rate requests largely correspond with public commentary from regional presidents. For instance, on Tuesday, Charles Evans of the Chicago Fed, which voted to leave the discount rate unchanged, said that he was nervous about the December meeting.

Goldman's pair of economists also referenced the experience of former Fed Governor Laurence Meyer, who detailed his time at the central bank in A Term at the Fed: An Insider's View.

“The influence of the discount requests are perhaps reinforced by the fact that the pre-FOMC Board discussions of monetary policy come at the time the Board reviews the Reserve Bank requests for discount rate changes," wrote Meyer, who intimated that governors who were more enthusiastic about the need for a change in the federal funds rate than the sitting chair could use the regional Fed presidents' requests to bolster their case.

So for earnest Fed watchers, these biweekly votes offer more than a faint signal of monetary policymakers' desires—if one can tolerate the noise that comes along with it. 

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