Tuesday, January 31, 2006

Bernanke's welcome, and what's up in Minnesota's economy? 

Mark Thoma noticed something interesting about the Fed's statement in raising the Fed funds target to 4.5% today.
Finally, and worthy of attention, Minneapolis did not request an increase in the discount rate potentially signaling the Minneapolis Fed was not in favor of further rate increases. We won't know for sure until the minutes are released.
For the non-economist readers: typically when the Fed funds rate is raised, the Federal Reserve banks will request an increase in the discount rate they charge banks for loans. The president of the Minneapolis Fed, Gary Stern, rotated off the FOMC this meeting so he did not vote on the increase in the Fed funds rate. We saw a broader amount of this behavior in the September meeting, as David Altig noted then.

... this information needs to be interpreted cautiously. All we know for sure is that these Banks did not submit a request for a 25 basis point increase in the discount rate (the rate the Fed charges banks for direct loans). We do not know if the Banks not included in this list wanted less or more. You are, of course, free to draw your own conclusions.
I seem to recall that Stern has, in the past, felt that robust economic growth was a reason to take rates up faster. I see nothing in the Beige Book report from Minneapolis that would indicate that we were somehow outside the experience of the rest of the country. Our own survey up here in St. Cloud would agree with that assessment. On the other hand, it could be concerns over increasing prices, in which case perhaps Stern wants to go faster on increasing interest rates. That would be, by the way, the doomsday scenario for the Bush administration and Republican leadership, since any speedup in the rate of discount rate increases would presage a recession in late 2006 and early 2007 ... just like Bush 41 had.

Lucky for them, though, this seems very unlikely. Given that the Fed's statement removed the famous "measured pace" language, new Chairman Ben Bernanke (swearing him in tomorrow -- the big guy was a little busy today) might have room to go a little slower -- rather than overshoot -- with increasing interest rates. Markets currently bet against going faster. (Go here and here for more statement parsing.)