Presidents, governors and directors … but the chair’s in charge

Directors from 8/12 Federal Reserve districts are now pushing for an increase in the discount rate. That includes the four regions whose presidents are full voting members of the FOMC for 2016 . The market is still only priced for a 50% chance of a rate hike by December, but the clamour from within the Federal Reserve system is now notably louder than at the same stage last year.

It doesn’t seem to have got much market attention, but yesterday saw the release of minutes from the Board of Governors discount rate meeting in July. As far as these things go, it is pretty interesting …

 

Due to arcane rules, the discount rate (i.e. the rate charged by the Federal Reserve system on its lending) is set by the Board of Governors whereas the Fed funds target rate is set by the broader FOMC. The directors of the regional Federal Reserve banks submit a request for the discount rate to be increased/decreased/maintained which is then evaluated by the Board of Governors. The presidents of four of those regional banks then vote alongside the Board of Governors at Federal Open Market Committee meetings...

 

Confused? Admittedly it is all a bit Byzantine with the distinction between governors, president and directors (with Janet Yellen presiding over it all as the chair).

The market is only priced for a 50% chance of a rate hike by December, but the clamour from the Fed is now notably louder than at the same stage last year.

The main thing you need to know is that the directors from 8/12 districts are now pushing for an increase in the discount rate. That includes the four districts whose presidents are full voting members of the FOMC for 2016 (i.e. St Louis, Kansas, Cleveland and Boston). The market is still only priced for a 50% chance of a rate hike by December, but the clamour from within the Federal Reserve system is now notably louder than at the same stage last year.

 

While not a racing certainty, we think that another rate hike by the end of the year is likely and are positioned accordingly. All else equal, this could be associated with another potentially destabilising bout of US dollar strength before the year is out.

 
send