Bloomberg News

Fed Directors Expressed ‘Heightened Caution’ on Outlook

July 19, 2011

(Updates with report’s interest-rate comment in fifth paragraph.)

July 19 (Bloomberg) -- Directors at the Federal Reserve’s regional banks expressed “heightened caution” about the pace of improvement in the economy, according to minutes of Board of Governors’ meetings in May and June.

The directors of the 12 banks “generally noted that recent economic data had been weaker than expected, and they expressed a heightened caution about the likely pace of improvement in the economy over coming quarters,” according to the minutes released in Washington today, which summarize discussions at the regional banks.

The minutes show that directors of the Fed’s regional banks shared Fed Chairman Ben S. Bernanke’s view in a press conference last month that some of the “headwinds” facing the economy, such as weakness in housing, “may be stronger and more persistent than we thought.”

“Several directors attributed the slower pace of recovery, in part, to factors that were likely to be transitory, but they expected the recovery would only be moderately strong even after those factors had dissipated,” according to the record of the meetings.

Previous summaries of discount rate meetings included the sentence that “most directors recommended that the current accommodative stance of monetary policy be maintained.” Today’s release said instead that “most directors recommended that the current primary credit rate be maintained.”

Four Meetings

The minutes covered four meetings from May 9 through June 20 to discuss the Fed’s discount rate, which it charges on emergency loans to banks. Recommendations about changing the rate, which has been at 0.75 percent since February 2010, were the same as in previous meetings, with 10 of 12 banks preferring no change. The Kansas City and Dallas Fed banks recommended raising the rate to 1 percent.

A separate set of minutes for the policy-setting Federal Open Market Committee’s June 21-22 discussion about monetary policy were released last week. The FOMC next meets in Washington on Aug. 9.

Directors pointed to price increases and regulatory uncertainty as some of the reasons for the slowdown.

“Many directors said that recent increases in the prices of food and energy had damped consumer spending and sentiment,” today’s minutes said. “Other directors expressed concern that uncertainty about fiscal and regulatory policies was weighing on business investment and hiring.”

Pre-Crisis Structure

Fed banks in Dallas and Kansas City last month said an increase in the discount rate by a quarter-point would be a step toward “a pre-crisis discount rate structure.”

None of the Fed’s 12 banks has changed its recommendation on the rate since June 2010. The Fed’s Washington-based Board of Governors expressed “no sentiment” for a change and kept it at 0.75 percent last month.

As of July 13, banks were borrowing $5 million in primary credit from the Fed discount window. The discount rate is 50 basis points above the Fed funds rate, which has been kept at zero to 0.25 percent since December 2008.

The central bank raised the discount rate in February 2010, a move it described as a “normalization” of lending terms and not a tightening of monetary policy. Prior to August 2007, the Fed kept the rate, also known as the primary credit rate, 1 percentage point above the target for the benchmark federal funds rate.

Discount-rate changes are requested by boards of directors at the 12 regional Fed banks. The requests are subject to final review and determination by the Fed Board, which consists of the central bank’s five Washington-based governors. They review requests about every two weeks.

--Editors: Scott Lanman, Kevin Costelloe

To contact the reporter on this story: Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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