Four of the Twelve Reserve Bank Boards Asked for a Higher Discount Rate. The Board of Governors Said No.

The Federal Reserve publishes the minutes of its discount rate meetings a few weeks after the fact, and they are one of the few places where regional opinion inside the system is recorded as a vote. The set released on August 25, covering meetings on July 20 and July 29, shows a third of the Reserve Bank boards pushing for a higher rate and getting nowhere.

How the discount rate is actually set

The primary credit rate is not set by the FOMC. Each of the twelve Reserve Banks has a board of directors that periodically votes on what the rate at its own discount window should be. Those votes are recommendations. The Board of Governors in Washington then approves a rate, and nothing changes unless it does.

The votes

• Cleveland: voted July 16 for 4.00%
• Minneapolis: voted July 16 for 4.00%
• Kansas City: voted July 23 for 4.00%
• Dallas: voted July 23 for 4.00%

Each of those is a quarter-point increase from the existing rate. No board voted for a cut. The Board of Governors took no action on any of the four requests, leaving the primary credit rate at 3.75%.

Where 3.75% sits in the rest of the framework

The implementation note issued after the July 28–29 FOMC meeting, effective July 30, set out the full set of administered rates:

• Federal funds target range: 3-1/2 to 3-3/4 percent
• Interest on reserve balances: 3.65%
• Primary credit rate: 3.75%
• Standing overnight repurchase agreement rate: 3.75%
• Overnight reverse repurchase agreement rate: 3.5%, with a per-counterparty limit of $160 billion a day

The line back to the FOMC

The July FOMC meeting produced three dissents in favour of raising rates. Reporting on the discount rate minutes notes that the three dissenting presidents came from banks whose boards had backed a higher discount rate. Chair Kevin Warsh has said the Committee holds to its inflation objective but that price pressures will not be resolved quickly.

Why it matters

The discount rate is the price at a facility most banks do not use in normal conditions, so the level itself is rarely the story. The vote count is. It is a periodic, on-the-record reading of how much of the regional Federal Reserve system thinks policy is too loose — and in July, four boards of twelve thought so, and the Board of Governors disagreed.