Fed Minutes Show Battle of the Birds: Hawks Versus Doves

Forget West Side Story’s Jets and Sharks rivalry. The Federal Reserve has its own internecine face-off between the fiscal hawks and doves, as the minutes to the mid-June meeting of the Federal Open Market Committee show, even though there was no increase in the benchmark federal funds rate then.

That means everyone should stop holding out hope for a quick and predictable end to rate increases this year.

Not that the hawks and doves are equal in numbers, but the dynamics seem strong and they make for future decisions that are impossible to closely read — other than the likely chance of two more rate hikes by the Fed in 2023. But why would anyone expect certainty when the entire global economy seems unwilling to provide it.

“Almost all participants stated that, with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook or the possibility that persistently high inflation might cause inflation expectations to become unanchored remained key factors shaping the policy outlook,” the minutes read.

“Even though economic activity had been resilient recently and that the labor market remained strong, some participants commented that there continued to be downside risks to economic growth and upside risks to unemployment,” the minutes showed. “Despite the receding of the stresses in the banking sector, some participants commented that it would be important to monitor whether developments in the banking sector lead to further tightening of credit conditions and weigh on economic activity. Some participants noted concerns about the potential risks stemming from weakness in commercial real estate”

“The hawks see inflation still intact although coming down,  but too slowly, requiring continued rate hikes,” wrote Quincy Krosby, chief global strategist for LPL Financial, in an email. “The doves, however, although acknowledging that inflation remains too high, prefer to maintain a pause and allow the cumulative effects of rate hikes unfold into the broader economy.”

An additional two hikes seemed likely in June when Fed Chair Jerome Powell offered his regular congressional testimony. “We have been seeing the effects of our policy tightening on demand in the most interest rate–sensitive sectors of the economy,” Powell. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”

But the time he mentions isn’t infinite or even moderately long-running. “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he said.