MacroScope

Fed doves strike back


Now that Washington’s circus-like government shutdown has put a damper on hopes for stronger U.S. economic growth going into next year, dovish Federal Reserve officials again appear to have the upper hand in the way of policy commentary.

Take Eric Rosengren, the Boston Fed President who had been unusually quiet as the tapering debate gathered steam. In a speech in Vermont on Thursday, he returned to a familiar theme – the central bank still has plenty of firepower and should not be afraid to use it.

Unfortunately, most of the risks to the outlook remain on the downside. Concerns over untimely fiscal austerity here and abroad, and the possibility of problems once again emerging in parts of Europe, could cause the Federal Reserve to miss on both elements of its dual mandate – employment and inflation – through 2016.

In my view, the asset-purchase program should remain dependent on incoming economic data, and we should seek to get the economy on a path to achieve both elements of the Fed’s dual mandate – employment and inflation – as soon as possible, hopefully by 2016. Should the economy speed up more rapidly than is sustainable, we can remove accommodation more quickly.

Should the economy unexpectedly slowdown, we can and should provide more accommodation than is currently anticipated. If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years – and that should only occur when the data ratify our forecast for an improvement in real GDP and employment.

Fed doves becoming an endangered species

 

It’s official: Instead of policy doves on the U.S. central bank’s Federal Open Market Committee, there are now only “non-hawks.” A research note from Thomas Lam at OSK-DMG used the term in referring to recent remarks from once more dovish officials like Charles Evans of the Chicago Fed and San Francisco Fed President John Williams.

The implied message from the latest Fed comments (or reticence), namely from the non-hawks, is that policymakers are clearly assessing a broader spectrum of considerations – beyond data-dependence – when mulling over the prospect of tapering in September.

Lam neglected to mention the silence from arguably the most dovish Fed member of all, Boston’s Eric Rosengren. He and Evans were at the forefront of calling for continuous and aggressive stimulus in the form of asset purchases. But recently, the Fed as a committee has shifted away from its emphasis on balance sheet expansion toward forward guidance –  thus far with mixed success.

Birds of a feather: the Fed’s hawk-dove continuum

As the Fed ponders providing another round of stimulus to a weak U.S. economy, it is difficult to keep track of the views of individual central bank officials. This newly-updated hawks-doves chart should help cut through the clutter. One good rule of thumb: keep a close eye on Ben Bernanke. The Fed Chairman is highly respected by his colleagues and his views usually carry the day.

*Update: here’s another interactive graphic focused on just the 10 current voting members on the Fed’s policy-setting panel.