The Federal Reserve holds a discount rate meeting on Monday. There is some speculation that the 75 bp discount rate could be lifted. At the September meeting - which isn't the same as the FOMC meeting -- five of the 12 regional Federal Reserve banks voted in favor a raising the discount rate. One favored cutting it.
The economic data has generally strengthened since then. Last month's FOMC statement and subsequent official comments have indicated that most officials appear on board with a December rate hike, barring a shock.
The discount rate is set by each of the regional Federal Reserves subject to the review of the Board of Governors. Despite reference to the discount window, to be clear, the discount rate is not a discount, but a premium over the Fed funds rate. And of course, a bank does not go to a window to access the funds.
We have argued, and the Fed's Vice Chairman Fischer emphasized the point earlier this week, that the Fed has done everything to avoid surprising the market with a rate hike. Even if one thinks it will ultimately decide not to hike next month, or does not think the Fed should hike, as the IMF among others have argued, a December hike will not be a surprise.
A discount rate hike can be seen as a technical adjustment as part of the normalization process to have a wider spread between the Fed funds target and the discount rate. Their proximity is another way to gauge the stance of the Federal Reserve. However for many, a hike in the discount rate would be a surprise and could be seen as delivering the FOMC a fait accompli for its December meeting. It would potentially steal the Fed's thunder and needlessly be seen as pre-committing it to a move.
Over time, gradually more regional Fed banks have been favoring a discount rate hike. Two banks clearly will most likely not support a discount rate hike: Minneapolis, which wanted a cut in the discount rate in September and the Chicago Fed, where President Evans has been on record opposing a December hike. In September, it was the Philadelphia, Cleveland, Richmond, Kansas City and Dallas Federal Reserve banks that called for a discount rate hike. Of the remaining banks, potential candidates to join the call for a discount rate hike include the Boston and Atlanta Fed's.
On balance, the Fed's leadership likely prefers not to disrupt or confuse with a discount rate hike next week. Instead, following lift-off, a discount rate hike is likely.