Some Fed bank presidents wanted higher emergency loan rate

Wednesday, May 26, 2010 | 12:01 a.m. CDT

WASHINGTON — Three of the Federal Reserve's 12 regional banks made a push last month to bump up the interest rate banks pay the Fed for emergency loans, according to a document released Tuesday.

The three regional banks were in Kansas City, St. Louis and Dallas. They wanted to boost the discount rate to 1 percent from 0.75 percent. The rate doesn't directly affect borrowing costs for Americans.

Late last month, Federal Reserve Chairman Ben Bernanke and his four other board members unanimously decided to keep the current rate.

Thomas Hoenig, president of the Kansas City Fed, James Bullard, president of the St. Louis Fed, and Richard Fisher, president of the Dallas Fed, have reputations for being inflation hawks.

Inflation hawks worry more about super-low borrowing costs stoking inflation, while inflation doves worry more about high unemployment.

Minutes of the closed-door regional bank meetings, which took place on different days in April, said regional bank officials noted improvements in the economy, including stronger-than-anticipated consumer spending.

Still, regional officials were "cautious" about the outlook, noting that companies remained wary of ramping up hiring. Squeezed state and local governments, meanwhile, could constrain spending and crimp employment.

At the same time, low inflation gives the Fed leeway to hold its key interest, which does affect consumer borrowing, at a record low near zero, the minutes said.

Hoenig, at each of the Fed's three meetings so far this year, has opposed the central bank's pledge to hold rates at record levels for an "extended period". He fears that could eventually lead to speculative excesses in the prices of stocks, commodities and other assets, and could spur inflation later on.

In mid-February, the Fed raised the discount rate by one-quarter percentage point to 0.75 percent, a move to bring policy closer to normal after the financial crisis.

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