Vang SJC

Dove and Hawk refer to Fed’s attitude and viewpoints about its policies. Dovish members are interested in the economic data such as jobs, growth rates and unemployment rates; and support easing measures to stimulate the economy. Meanwhile Hawkish members are concerned about inflation and prefer tightening policies, although economic growth and employment might be restrained.

So Fed is a dovish or hawkish central bank?

Currently Federal Open Market Committee (FOMC) consists of 12 members, including the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. Each president has a different perspective on the Fed’s policy so their statements about economic situation often seem to be contradictory, as well as the time for a rate hike. Among the members of the FOMC, who is dovish, who is hawkish and how it influences Fed upcoming decision?


Supposed-to-be dovish memebers in FOMC include: Fed Chairman Janet Yellen, Vice President Stanley Fischer, board members Daniel Tarullo, Lael Brainard, and Chicago Fed President Charles Evans.

Janet Yellen seems to be dovish as she always resorts to economic data for timing rate hike. And 2 indicators to measure economic health is unemployment rate and inflation target.

Those who suggest that it’s not the right time for a rate hike (Dove) are New York Fed President Dudley Williams, Boston Fed president Eric Rosengren and Minneapolis Fed President Narayana Kocherlakota (not in FOMC 2015).

Centralists include governor Jerome Powell, Atlanta Fed President Dennis Lockhart, and San Francisco Fed President John Williams.

Hawkish group includes Cleveland Fed president Loretta Mester, St. Louis president James Bullard, and president of the Kansas City Esther George.

Hawks, who think it’s time to raise interest rate, are Richmond Fed President Jeffrey Lacker, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher.


Of the 12 banks, the Federal Reserve Bank in New York plays prominent role because it is representative for Wall Street financial oligarchy. Theoretically, the voting rights is equal among bank, however it can not be ensured that small bank in Dallas has equal voice with larger banks like New York.

Last year New York Fed President Dudley Williams reiterated that economy is still on recovering and not strong enough for a rate hike, a rate hike leads to stronger dollar and put pressure on inflation (dovish stand). In April 2014, he seemed to be more hawkish as stating that Fed may raise interest rates in June and expressing confidence on improving inflation. He made the statement right after the retirement of 2 hawkish presidents, which indicates that Fed wants to keep both dovish and hawkish members to be more flexible in policy decisions.

On September 2014, Charles Plosser and Richard Fisher announced his retirement in March and April 2015, and will not participate in voting Fed policy. Both presidents opposed easing policies of Fed and QE. That means tightening pressure will be eased even though the Fed still has to consider the views of the Voters and non-Voters.

In the context of the under-expectation economic growth after QE 3 (blaming weak growth rate in the first quarter for bad weather and strike at the West Coast), far-from-target inflation (due to falling oil prices and strong dollar) and global political instability (Iraqi war, Ukraine tense, Greek debt crisis, the Russian embargo, China hegemony, and so on), the Fed need to be flexible. As a result, Fed often has ambivalent or ambiguous speech on timing for a rate hike to be more flexible in the next step.

Fed’s two mandates are price stability (inflation) and employment (unemployment rate), but these two factors have an inverse relationship, the decrease in the latter means an increase in the former and vice versa. So what is Fed’s priority? What’s their moves?

Price stability

Does the fed really want to increase annual inflation to 2%, such that the price level of the country will increase by more than 700% over the next century? Is that what Congress had in mind when it tasked the Fed with achieving “stable prices”?

Former Fed chairman Alan Greenspan knew that it did not. On July 2, 1996, at a meeting of the Federal Open Market Committee (FOMC), which was devoted to extensive discussion of the appropriate inflation target for the Fed, Greenspan posed a simple question: “Are we talking about price stability or are we talking about zero inflation?” he asked. “As we all know, those are two separate things.”

At the time of that FOMC meeting, the consumer price index was increasing at about 3% per year. Most of the discussion focused on whether the Fed should slow annual price growth to 2% or even lower, thereby consolidating the gains made in the difficult fight against inflation that policymakers had waged for the previous 15 years. Greenspan summarised the consensus: “…we have now all agreed on 2%…”.

It was measured by PCE (Private consumption expenditure) including health care costs paid by insurer and goverment, while CPI covers only real hospital costs going out of consumers’ pocket. In the PCE, health care accounted for 20% of the total, compared with just 6% in CPI. Housing accounts for 23% of PCE and 42% of CPI. The other components make up for smaller proportion.

Unemployment rate

The Fed’s task of full employment: It does not mean all of workers work 24/7, 365 days per year and the unemployment rate is 0%. There is a natural unemployment rate that does not cause pressure to increase or decrease the inflation, depending on the dynamics of the labor market. (When the economy is growing well, it still has a certain unemployment rate because a workers join or withdraw from the labor force regularly to look for a better job, the current unemployment rate call natural unemployment).

In fact, US has never experienced 0% unemployment rates, the lowest rate ever was 2.5% achieved in May and June 1953, when the economy was overheated due to the war in Korea. In 1953 this bubble burst and caused the 1953 recession.

Fed said: “The level of full employment is largely determined by non-monetary factors affecting the structure and dynamics of the labor market. These factors may change over time. “(Demographics of the labor market and other factors).

In the longer term, inflation may be adjusted by the actions of central banks, in other words, through the monetary policy. Policy makers may forecast the inflation rate target. However, the natural rate of unemployment is out of control of the central bank. Natural rate of unemployment reflects the labor force and tend to change as the labor market changes.

The recent economic data showed prosperity while nonfarm payrolls in May added 280,000 jobs, up from April, the number of unemployment claims fell, along with the average wages increase by 0.3%, compared with 0.1% in the previous month. But in reality, workers are unable to make ends meets with their current jobs. Salaries are improving but at a sluggish rate. Many people have little opportunity for promotion. Others choose temporary jobs, part-time jobs or freelancers without remuneration and stability. Therefore, a large number of jobs do not bring as much economic benefits as before.

According to a Fed survey, almost half of Americans said they could not cover emergency expenses of over $400 without borrowing money or selling assets. Even 60% of participants do not expect salary increases in the next 12 months.

It can be noticed that the Fed prerequisite objective is to improve wages, in other words, the living standards of the people.

To achieve these two tasks with minimum trade-offs, the Fed must act flexibly and can not follow a certain rigid formula. The factors affecting the decision of the Fed may be the level of economic losses caused by unemployment and inflation, or the speed of unemployment and inflation, which one will reach Fed’s target first.

Interest rate 

In addition to two main tasks above, the Fed still one more task 3 is to maintain moderate interest rates of long-term in Section 2A of the Federal Reserve Act. This mission received little attention because it was the inevitable consequence of the price stability target.

The interest rate is divided into real interest rates (adjusted for inflation) and interest rate expectations.

The chart below shows the yield of 10-year Treasury bonds and the rate of inflation from 1960 to 2010. It was found that 10-year inflation expectation was high in the early 1980s when the real inflation rate was also high. Over the past decade, inflation expectations was lower and more stable when real inflation was also low.


If prices are kept at stable level, inflation expectation will stay low. Long-term interest rate would be low as well (Real interest rate = nominal interest rate – inflation expectations).

In this way, the Fed can achieve task no.3 as a reaffirm the success of its 2 mandates (dual mandate).

Janet Yellen vs. Ben Bernanke

Ben Bernanke held Fed chairman from February 1st 2006, being famous for his study about deflation (hawkish). In the first speech in the position of president, he announced the Fed’s responsibility is not only to prevent inflation but deflation as well. He also outlined specific measures that the Fed could do to prevent deflation (called Bernanke Doctrine).

On February 15th 2006, in the first report to Parliament, Bernanke said the US economy was sustainable and a rate hike was necessary to curb inflation. In the first meeting with FOMC on March 2006, Bernanke and board members aggreed to raise basic rates to 4.75%. However, when the global economy fell into recession, he “pumped” trillion dollars into the economy through three QEs 3 and lowered interest rates to near 0%.

What about Janet Yellen? The first female president of the Fed is more concerned about unemployment and the labor market, therefore she is considered as a “dove” with well-known research “The Fair Wage-Effort Hypothesis and Unemployment”. In her opinion, the labor market can not create jobs without the implementation of easing policies. She also shares the same viewpoint with Ben Bernanke that unempoyment is more dangerous to the economy than inflation. She also remarked that reducing unemployment rate is the key task even if it causes inflation to exceed 2% temporarily.

Ban Mai