Monetary Policy Analysis > Discount Rate Minutes
Date: August 29, 2019
From: Bill Nelson
Subject: Discount Rate Minutes
As many of you know, the Board of Governors releases minutes of its regular meetings to discuss discount rates on or about the Tuesday after the FOMC meeting minutes are released. The Board meetings to discuss discount rates take place every few weeks, and if the FOMC has changed its target for the federal funds rate, there is a quick Board meeting on discount rates immediately following the FOMC meeting. The discount rate minutes released after the FOMC meeting minutes covers discount rate meetings up through the previous FOMC meeting.
The minutes can be found at the bottom of this page here. The minutes are a little hard to find. From the Board’s main webpage select “monetary policy” then “policy tools” and then “discount rate.”
There are 3 discount window lending programs – primary, secondary, and seasonal – and each Reserve Bank has its own rate, so there are 36 discount rates. But all the Reserve Banks set the same rates (apart from a day or two variation), and the rate that matters is the primary credit rate, a.k.a. the “discount rate.” The Boards of Directors of each Reserve Bank submit requests to establish specific rates and the Board approves or ignores those requests. If a request is made and approved, the change is made.
Even though the requests are made by the Reserve Bank Boards of Directors, they usually align with the policy preference of the Reserve Bank President. Specifically, Reserve Banks will usually have submitted requests to the Board in advance of the FOMC reflecting the view of the Reserve Bank President so that if that specific action is taken the Board of Governors can immediately approve the request from the Board of Directors and change the discount rate of that Reserve Bank with the FOMC’s change in fed funds target rate.
The minutes occasionally contain useful information about monetary policy, although not blockbuster information. For example, as I discussed with several of you, it was somewhat surprising that at the time of the July FOMC meeting the New York Fed did not have a request in with the Board of Governors to reduce rates 25 basis points. You can tell they didn’t because the FOMC statement issued after the meeting did not indicate that the Board approved a request from FRBNY (only Philadelphia, Chicago, St. Louis, Dallas, and San Francisco) to lower the discount rate. My wild guess at the time was that the New York Fed had a Board of Directors meeting scheduled the day after the FOMC meeting and simply wanted to wait for that meeting to decide on the request. Another possibility was that the New York Fed had submitted a request to cut 50 bp reflecting President Williams possible preference for aggressive easing and so the Board had to wait for a 25 bp request.
Turns out neither is true: The New York Fed Board of Directors had voted on July 25, just a few days before the meeting, to leave the discount rate unchanged. That raises some interesting questions. Did Williams want no change? Seems implausible. More likely is that the NY Fed Board of Directors took an action in contradiction to what Williams wanted. Moreover, right before the FOMC meeting Williams gave a speech that suggested to many that he wanted to cut 50 bp; did he give that speech even though his own Board wanted no change? Add in the Potter-Dzina travesty and it sounds like there may be turmoil at the New York Fed.
The discount minutes also include a discussion of the Directors’ views of the economy, which occasionally can be a little interesting. For instance, to my ear, the minutes to the July 22 meeting suggest Directors are more for “no change” than for cutting the funds rate.
“Overall, Federal Reserve Bank directors remained positive about economic conditions and the outlook, although some directors expected the pace of growth to slow. Several directors reported continued strength in consumer spending. Directors’ reports on activity in residential real estate were generally solid, and some directors noted a pickup in mortgage refinancing. Labor market conditions remained strong across most Districts. Several directors highlighted ongoing difficulties attracting and retaining qualified workers, as well as upward pressures on wages for workers with certain skills. Most directors continued to cite heightened trade tensions and the associated uncertainty as risks to the U.S. economic outlook. Several directors noted that inflation was close to 2 percent; others noted that inflation had persistently run below 2 percent for some time and that indicators of inflation expectations had drifted lower.”
Lastly, the discount rate minutes can be more interesting when the FOMC takes no action than when the FOMC takes an action. When there is no action, the FOMC communications don’t reveal the identities of Reserve Bank Presidents that would have preferred a change, but the discount rate requests essentially do.
As always, I’d be glad to discuss, please feel free to share, and let me know if you’d like to stop receiving these emails.