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Fed Officials Disagreed
Over Course in December
By SUDEEP REDDY
January 9, 2008

Federal Reserve officials appear to have entered last month's policy meeting with an unusually wide range of views about how to respond to the uncertainties facing the economy, minutes of the central bank's discount-rate deliberations show.

The minutes indicate that three regional Fed banks -- Boston, Minneapolis and San Francisco -- sought half-point cuts in the discount rate, at which the Fed makes direct loans. Two Fed banks -- Dallas and Kansas City -- wanted no change. The other seven regional banks backed a quarter-point reduction to 4.75%, which was ultimately approved.

The disagreement among some of the 17 current Fed officials illustrates the debate within the Fed about how to balance the risks to economic growth against worries about rising inflation. Since Dec. 11, a jump in unemployment and continued skittishness in financial markets have led investors to expect a quarter-point, and possibly half-point, cut in interest rates at the end of this month. Two Fed officials yesterday hinted they were open to such a cut, though one of them suggested inflation remains a serious concern.

The regional banks' requests regarding the discount rate can signal how the presidents of those banks are thinking ahead of the Fed's meeting on its more-important policy tool -- the federal-funds rate, at which banks lend to each other overnight. Fed governors in Washington set the discount rate based on requests from regional-bank boards.

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• Fed Minutes Indicate Dispersion of Views Only two of the five regional banks seeking a higher or lower discount rate than what was approved had a vote on the Federal Open Market Committee, which sets the federal-funds rate. One of the voters, Eric Rosengren, president of the Federal Reserve Bank of Boston, dissented at the Fed's Dec. 11 meeting, at which the federal-funds rate was lowered by a quarter point to 4.25%. He wanted the key rate cut by a half point.

The other voter, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, backed the quarter-point cut in the federal-funds rate in December, but had been the lone dissenter at the Fed's October meeting, when he supported leaving rates unchanged as the Fed approved a quarter-point reduction.

The seven banks seeking a quarter-point reduction in the discount rate last month "generally agreed that the downside risks to economic growth had increased and that conditions in financial markets had recently deteriorated," the minutes said. "Some directors thought that a reduction in the primary credit rate might improve liquidity in the interbank term funding market."

The three banks seeking the half-point cut believed "financial market conditions and the economic outlook necessitated a larger reduction in order to provide some insurance against a more serious economic downturn," the Fed said. Those who sought no change at all, however, "considered concerns about a slowdown in economic activity to be offset by continued inflation pressures."

The discount rate and federal-funds rate generally are raised or lowered in lockstep. In August, however, the Fed cut in half the one-percentage-point spread between the two rates in an effort to address worries about a mounting credit crisis. As concerns grew again last month, some Wall Street analysts expected the Fed to shrink the gap even further. The minutes don't indicate whether any of the three banks seeking a deeper cut were doing so to narrow the spread.

Fed officials' recent comments reflect renewed worries about economic growth, though policy makers differ on the depth of the slowdown. Futures markets expect the Fed to cut interest rates by at least a quarter point on Jan. 30, and investors are putting odds of a half-point cut at better than 2 to 1.


Mr. Rosengren said in a speech yesterday that the housing slump, which has already heightened the risk of an economic downturn, could yield further home-price declines that are likely to hurt consumer and business confidence and spending.

"Since prices have declined substantially even in a relatively benign economic environment, one cannot discount the possibility that they could fall more rapidly should economic performance not remain strong in 2008," added Mr. Rosengren, who isn't on the FOMC's voting rotation this year.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, reiterated his worries about higher inflation constraining officials, and said he was "still optimistic that the economy will improve appreciably" by the second half of the year. But Mr. Plosser, a 2008 FOMC voter, also noted the risk of "even weaker economic growth."

"A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy," he said.