By Alyce Andres-Frantz and Joe Plocek

CHICAGO (MNI) – Ray Stone, principal of Stone & McCarthy Research
Associates Monday said urgency for the Federal Reserve to hike the
discount rate has decreased recently due to a decline in borrowing.

In a research note on March 18, Stone wrote, “If I am correct the
Federal Reserve Board should have a closed door meeting today where they
will review petitions to increase or maintain the existing discount
rate.”

But, Stone told MNI — since the day he wrote about the heightened
odds of another discount rate increase — those odds “have decreased.
This is because over the past two weeks banks have been borrowing less
from the window.”

The protocol for the discount rate is that the Directors of the
individual Federal Reserve Banks petition the Fed every few weeks to
maintain, raise or lower the discount rate.

Stone is referring to Primary Credit on the Federal Reserve’s
balance sheet (formerly referred to as discount window loans) which have
been declining. These totaled $18.7 billion at year-end 2009, and now
are a far lower $10.75 billion in the latest period.

Primary credit is trending down and one can especially see dip
after the 25 bps hike to 75 basis points announced on February 18, to be
effective the next day. These loans were $14.3 billion on February 17,
and fell marginally in the next three periods, before dipping further in
the past two weeks.

Stone added that, “The purpose of the first (on February 18)
increase was to redirect funding away from the window and back to the
funds market.”

“The initial response was unimpressive,” Stone said, but added that
“over the last two weeks borrowings have declined.”

“A further normalization of the discount rate will certainly come,
but the urgency to adjust the rate has been diminished by the decline in
borrowing,” Stone said. The lack of borrowing leaves little to redirect
back to the funds market.

Given the change in borrowings, “another hike in the discount rate
will probably not be approved at today’s Board meeting,” Stone said.

Less borrowing means “the normalization of the discount rate can be
done at the Board’s convenience.”

Federal Reserve Chairman Ben Bernanke seems to be making a
distinction between ‘policy’ and ‘normalizing’ moves, and DR policy
seems to be the second. Wrightson & Associates write, “In Bernanke’s
view, shrinking the Fed’s balance sheet by selling securities
constitutes a policy tightening, while sterilizing the expansion of the
balance sheet through short-term draining operations is more of a
technical maneuver.”

“Given the lack of recent advertising of an impending discount rate
hike, I sense that this is not yet a convenient time,” Stone concluded.

–email: aandres@marketnews.com

** Market News International Chicago Bureau: (708) 784-1849 **

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