(Corrects to show Kansas City Fed, not Richmond, voted for discount rate hike in paragraph 2)
WASHINGTON - Three regional Federal Reserve banks last month wanted to raise the discount rate, which the Fed charges banks for emergency loans, according to minutes from Fed meetings released on Tuesday.
The regional banks of Kansas City, St. Louis and Dallas wanted to boost the primary credit rate to 1 percent from the current 0.75 percent in an effort to normalize the differential between it and the benchmark federal funds rate.
Before the credit crisis struck in 2007, the spread between the two rates was a full percentage point. There is internal disagreement at the Fed as to whether that gap should be returned completely to that level, a debate that has likely taken on new importance with the debt turmoil in Europe.
As another step toward restoring a pre-crisis discount rate structure, some directors supported increasing the primary credit rate by 25 basis points (to 1 percent) at this time, the minutes from the meetings of the Fed's Washington-based board of governors said.
Since the Fed's last policy meeting in late April, global financial markets have taken a severe hit as investors worry about budget deficits throughout Europe, repeatedly pushing the euro common currency to fresh four-year lows.
In the meantime, the U.S. recovery has been looking stronger than many had anticipated. The minutes showed Fed regional bank directors were surprised by the firmness of consumer spending. They worried that companies were still reluctant to hire in significant numbers.
Given such lingering weakness, most believed the current ultra-easy policy stance remained appropriate.
In light of persistent downside risks and the continued outlook for a gradual recovery, and with inflation moderate and inflation expectations stable, most directors concluded that the current accommodative stance of monetary policy should be maintained, the minutes said.
Financial strains in Europe have prompted many Wall Street economists to push back their forecasts for the start of any Fed tightening out until at least next year.
Many observers, including top Fed officials, have highlighted the risk that Europe's travails will lead to a renewed credit crunch, potentially curtailing the U.S. economy's incipient expansion.
Some market guideposts were already flashing red. U.S. stocks are down some 12 percent in the last month. The cost of borrowing between banks, a key marker of credit availability, was near its highest level in 10 months.
The Fed's Board meets periodically to consider requests from regional Fed boards to shift the discount rate, which has historically been moved in concert with the overnight federal funds rate. That rate is controlled by the Federal Open Market Committee, and is the central bank's primary policy tool, affecting borrowing costs in the rest of the economy.
The minutes of both FOMC and regional Fed board meetings are released with a lag.
(Editing by Kenneth Barry)