St. Louis, Minneapolis Feds Backed Full-Point Discount Rate Hike

(Bloomberg) — Directors at two of the Federal Reserve’s 12 regional branches favored a 100 basis-point increase in the discount rate in July, signaling internal pressure for a bigger move than policy makers delivered last month.

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The boards of the St. Louis and Minneapolis banks voted July 14 for a 100 basis-point discount rate rise, according to minutes of discount-rate meetings released by the Fed on Tuesday. A day before their votes, a report showed the US inflation rate jumped to a fresh four-decade high in June.

Policy makers on the Federal Open Market Committee voted unanimously on July 27 to lift their policy benchmark, which is a different rate called the federal funds rate, by 75 basis points to a range of 2.25% to 2.5%. The Fed Board also raised the discount rate by the same amount to 2.5%. The discount rate governs the cost of borrowing for banks from the Fed’s discount window.

Discount-rate votes by regional Fed directors can be symbolically important as a sign of preference for how rates should move, and can semaphore the views of that bank’s president. St. Louis Fed chief James Bullard has been a long-standing hawk and Minneapolis’s Neel Kashkari has recently joined him on that wing of the policy-setting FOMC.

Directors at nine of the regional banks had voted for a 75 basis-point increase in the discount rate by the time of the July 27 meeting, while Kansas City Fed directors sought a 50 basis-point hike. Kansas City Fed President Esther George had dissented in June against a 75 basis-point increase, citing concern the larger move could stoke policy uncertainty.

Both George and Bullard voted with their FOMC colleagues for the 75 basis-point increase in July. Kashkari doesn’t vote this year.

“Federal Reserve Bank directors reported elevated inflation, tight labor markets, and signs of slowing economic activity,” the minutes said. “While some directors said demand for goods and services remained strong, in other districts, spending — particularly on goods relative to services — had softened.”

(Updates with more details in final paragraph.)

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