Thursday’s Federal Reserve decision to raise the discount rate, the interest rate banks pay to borrow from the Fed, may not be the “no big thing” that chairman Ben Bernanke and the financial markets (so far) say it is.
The minutes of the January 14 meeting of the Federal Reserve’s board of governors and the regional Federal Reserve presidents released today, February 23, show that interest rate policy hawks may be driving Fed policy faster than Bernanke publicly acknowledges.
Thomas Hoenig, president of the Kansas City Fed, and James Bullard, president of the St. Louis Fed, emerge from the minutes as the committee’s most vocal advocates of moving interest rates back to normal in relatively quick order.
Hoenig, who got his voting seat back in January with the Fed’s normal rotation among regional Fed presidents, and Bullard voted at the January 14 meeting to raise the discount rate from 0.5% to 0.75%. The rest of the group disagreed and left the discount rate where it was.
Yet it was exactly the Hoenig and Bullard position that the Fed adopted on February 18 when in between meetings of the interest-rate setting Open Market Committee, the U.S. central bank raised interest rates.
Fed chairman Bernanke will testify in Congress tomorrow and he’s expected to repeat his pledge to keep interest rates low “for an extended period” and to argue that the increase in the discount rate doesn’t mean that the Federal Reserve intends to raise its benchmark interest rate anytime soon.
But the minutes show that objections to the “for an extended period” promise is rising. Two Fed members in dissent hardly makes a majority but two—with voting powers–is still a lot more than were urging higher interest rates just a couple of months ago.