Fed: Caution on the discount rate meeting minutes - RBS

Research Team at RBS, wanted to add a quick word of caution on the Fed’s discount rate meeting minutes published yesterday.

Key Quotes

“Perhaps it was the lack of other things to talk about yesterday, but it seems as if some in the market were latching on to this development and trying to retrofit it onto a preexisting, hawkish thesis. It seems every 56 months some sensational headline circulates regarding what is a largely technocratic or mechanical discount window process. While it is somewhat notable that 8 fed presidents voted for a discount rate hike (vs. 6 at the June meeting) for hardcore Fed wonks that are interested in these types of things, we would caution against reading too far into the broader policy implications of these developments.

For one, I highly doubt the minutes of these meetings are how the FOMC would communicate policy intentions, should they want to do so. Also keep in mind that the directors of each district Fed bank are the ones that vote on these recommendations, meaning they do not necessarily represent the views of the bank presidents or their senior policy advisors who actually participate in the FOMC meetings.

Lastly, the corridor between the discount rate and fed funds target rate was 100bps before the crisis. Some of those voting for an increase in the discount rate may be doing so because they want to return to a more “normal” spread, not because they are pushing for a fed funds target increase.”