Overview: Will the Fed's doves and hawks find common ground? (Part 2 of 11)
Finding common ground
In a normal context, the views of the doves and the hawks aren’t that different when it comes to the Fed’s twin mandate. The doves acknowledge that inflation-targets are important, but they tend to focus more on the full-employment target. The hawks would say that full employment is an important part of the Fed’s mandate, but they give more preference to the inflation target.
Monetary policy stance based on current fundamentals
In the present context, both sides agree there has been improvement in the labor market, although the unemployment rate is still higher than the Fed’s target long-term range of 5.2%–5.6%. Based on the personal consumption expenditures (or PCE) inflation measure used by the Fed, both sides also agree that current inflation is short of the Fed’s long-term target of 2%. Also, most Fed officials (with the exception of Charles Plosser) appear to favor tapering of monthly asset purchases at the current pace. Tapering of monthly bond purchases is projected to end this October.
Impact of the Fed’s accommodative monetary policy
Most of the differences in recent years have surfaced due to the impact of quantitative easing (or QE) on the economy. The doves believe the monetary stimulus and low rates have been necessary for the economy to get back on its feet. The hawks have maintained that the unprecedented stimulus will likely lead to future inflationary pressures, especially when the time comes to normalize monetary policy and the Fed’s balance sheet of over $4 trillion.
However, both doves and hawks agree that QE may have had some undesirable consequences with regards to excessive risk taking in markets which may threaten financial stability. Regarding this point, there are differences. Some hawks (Kansas City Fed’s Esther George among them) are advocating for earlier higher rates, to control excessive risks in financial markets.
Both stock (VOO) and bond (AGG) market investors take a keen interest in the views of Fed officials. Prospects of a rate increase or decrease tend to translate across different segments of the bond market including both high-yield (JNK) and municipal debt (PZA) among others. They also tend to impact the investing and financing decisions of both large-cap (IVV) and small-cap companies.
The use of Taylor rules to determine the path of the Fed funds rate
A number of Fed officials, both doves and hawks, have advocated the use of Taylor-like rules for providing forward guidance to markets to determine the future path of the Fed funds rate. Doves include Chicago Fed’s Charles Evans and San Francisco Fed’s John Williams. It’s important to note that hawks—Philadelphia Fed’s Charles Plosser and Kansas City Fed’s Esther George—have also commented on the use of these rules. A more detailed explanation on Taylor-like rules can be found in Part 4 of this series.
James Bullard, perceived to be a centrist, has also advocated the use of Taylor-like rules. To learn more about Dr. Bullard’s view on monetary policy, please continue reading the next section in this series.
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