–Updating 14:00 ET Story on Discount Rate

By Denny Gulino

WASHINGTON (MNI) – In the latest discount rate minutes most
regional Federal Reserve Bank directors wanted the Fed’s primary rate,
the rate its charges at the discount window, to stay where it is, 0.75%,
but two regions on the upswing in the latest Beige Book survey
disagreed, one wanted a higher rate and one a lower.

With the Fed’s discount or “no questions” window hardly a popular
source of funds for banks these days, it might not matter what the
borrowing rate is. When the short-term rates the Fed controls are zero
to a quarter point, why would a bank want to pay three-quarters of a
point and perhaps be tainted by any discount window stigma.

Nevertheless, the difference of opinion seemed to suggest the
business and community leaders who are directors of the two regional
Banks see things differently.

Both the Boston Fed Bank, which wanted an easier rate of half a
percent about three weeks ago, and the Kansas City Bank, which wanted a
tighter rate of a full percent, anchor areas that are seeing upswings in
their regional economies.

The most recent Beige Book survey of Fed regions saw in the Boston
area “increased optimism about 2012′ among retailers, Software and IT
services companies continued “to see good demand growth.” Manufacturing
contacts in New England reported “relatively strong performance
continuing in recent months.”

Likewise, the Beige Book’s report from the Kansas City Bank saw the
economy edging higher, consumer spending improving and bankers reporting
“mostly steady loan demand” and better loan quality.

Yet typical of the outlook is that the word “mixed” was
interspersed in the report, in the Kansas City region, attached to
agricultural activity, in the Boston report, attached to retailing.

And on the pessimistic end of the spectrum, an “uncertain” future
was another phrase found in the Boston report, and not in the Kansas
City report.

In Boston, “outlooks for the remainder of the year are mixed, with
some contacts anticipating 2011 sales falling short of last year and
others predicting sales to reach last year’s level. Respondents expect
relatively stable prices in the coming months, but note the possibility
of moderate declines.”

In Kansas City, in contrast, “some firms reported difficulties
finding skilled workers and were forced to raise wages, particularly in
energy and information technology fields. Hiring plans were generally
solid for most firms, particularly those in the energy, information
technology, and manufacturing sectors.

“Some” of the directors “reported encouraging though uneven
increases in consumer spending and retail sales, as well as further
gains in manufacturing activity in certain sectors,” the Fed said in its
Tuesday discount rate minutes, characterizing the regional bank
directors’ opinions early this year.

At the same time, the Fed said, “The housing sector remained weak,
despite pockets of increased activity in some parts of the country.
Although conditions in labor markets had shown some signs of
improvement, directors remained concerned about the elevated rate of
unemployment.”

“Many directors also cited the downside risks posed by ongoing
uncertainty about global financial markets and U.S. regulatory and
fiscal policies,” the discount rate minutes went on.

“Inflationary pressures had continued to moderate, and longer-term
inflation expectations had remained stable. Against this backdrop, most
directors recommended that the current primary credit rate be
maintained.”

** Market News International Washington Bureau: 202-371-2121 **

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