Happy Wednesday! Bit of a fun topic this week, but an important one as the Fed finds itself at a crossroads…

IN ACTION

“Thus, when a negative shock hit the economy, the wage contract workers suffered a bigger reduction in employment because wages couldn't adjust, whereas in the competitive sector, wages would adjust to soften the blow to employment—implying that if the wage contract sector got to choose a conservative central banker, they would want a more dovish central banker who would accept higher inflation in return for greater employment stability. The flexible wage workers wanted the opposite: They were more hawkish on inflation because they didn't bear the same employment volatility.” - Speech by Governor Waller, Thank You, John (May 9, 2025)

THE BASICS

“Dovish” and “hawkish” are terms used to describe the Federal Reserve’s stance on monetary policy. They represent the delicate balance the Fed must strike between promoting growth and controlling inflation, as well as the impacts of the tools used to achieve its goals. Dovish refers to a monetary policy stance of lower interest rates to promote growth and low unemployment, while hawkish refers to a stance of higher interest rates to control inflation.

WHY IT MATTERS

As a general rule, when the Fed lowers interest rates, it tends to boost economic growth and increase inflation, while raising interest rates typically slows growth and reduces inflation. A growing economy benefits everyone, especially workers who might otherwise be unemployed. Inflation, however, harms everyone by reducing purchasing power. Dovish and hawkish views can be thought of like this: dovish policymakers believe the benefits of lower interest rates outweigh the risks, hawkish policymakers prioritize price stability despite the consequences of higher interest rates.

While investors and commentators often label the Fed as dovish or hawkish, it’s important to remember that the Federal Open Market Committee (FOMC) consists of twelve voting members. FOMC members frequently have differing views on the appropriate direction of interest rates. While the majority determines the outcome after each meeting, this natural disagreement provides valuable counterpoints during the committee's decision-making process. The diversity of perspectives on the FOMC help ensure that the Fed's decisions are well-rounded, but can also introduce unpredictability around the direction of future decisions.

2025 AND BEYOND

It remains unclear whether the Federal Reserve will adopt a dovish or hawkish approach in response to recent economic developments. After last week’s FOMC meeting, it appears that the inflationary pressure and uncertainty introduced by tariffs have pushed the Fed toward a more hawkish stance - with predictions for rate cuts decreasing from three to one throughout the remainder of 2025. During his press conference, Chair Powell signaled that the Fed is prepared to take a wait-and-see approach. He noted that while "soft” data was alarming (weaker consumer confidence, reduced business investment), monetary policy was well positioned to wait for stress to emerge in the “hard” data (inflation reports, labor market figures).

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