24 December 2002, 08:33  4 Fed Banks Sought Discount-Rate Cut Before Nov. 6

/www.bloomberg.com/ By Craig Torres
4 Fed Banks Sought Discount-Rate Cut Before Nov. 6 (Correct)
(Corrects timing of regional Fed banks' votes to reduce discount rate in first and fourth paragraphs.)
Washington, Dec. 23 (Bloomberg) -- Four regional Federal Reserve banks voted to reduce the discount rate prior to the Nov. 6 policy meeting when Fed officials agreed that rates had to fall to help the slowing economy.
The discount rate, or what banks pay for direct loans from the Federal Reserve, is a bellwether for monetary policy. The rate typically rises and falls with the Fed's target for the federal funds rate, the cost for overnight loans between banks. The federal funds rate is explicitly targeted by the Fed and is the most important indicator of the central bank's policy.
The Fed's rate-setting Open Market Committee voted unanimously Nov. 6 to cut the discount rate by a larger-than- expected half-percentage point to 0.75 percent from 1.25 percent, approving requests submitted by the Dallas and New York Fed banks. The rate is now the lowest since October 1942, when it was 0.50 percent. The Fed also reduced the federal funds target rate to 1.25 percent, the lowest since 1961, at the Nov. 6 meeting.
Four Fed banks voted in late October to reduce the discount rate. Minutes from the discount-rate deliberations say directors from the Dallas and New York Fed banks cited ``decreases in retail spending, lower levels of consumer confidence, the impact of layoffs, and uncertainty related to the threat of war and terrorism'' in their request to reduce the discount rate by half a percentage point. Directors at Boston and Philadelphia had sought a 0.25 percentage point reduction because of ``concern about the outlook for consumer spending'' and business investment, particularly in nonresidential construction.
The Fed Board of Governors in Washington voted on Nov. 4 not to change rates before the regular meeting of the policy committee Nov. 6.
The Dallas Fed had been calling for a cut in the discount rate since Sept. 24, when its president, Robert McTeer Jr., dissented and asked the Fed's Open Market Committee to reduce interest rates. The majority of committee members voted to hold the federal funds rate steady at 1.75 percent at that meeting.
On October 21, the Board of Governors rejected requests by the Dallas Fed to cut the discount rate by a half-percent point and by the Boston Fed for a quarter-point reduction. The governors also had rejected a Dallas Fed request for a half-point cut two days after the Sept. 24 policy meeting.
The discount rate is priced below the market for bank reserves, and therefore contains a subsidy. In January, the Federal Reserve will eliminate the subsidy and price the discount rate at 1 percentage point above the federal funds rate for loans to sound banks.

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