Divided Fed Over Additional Rate Hikes...Examining Hawks and Doves

The U.S. Federal Reserve (Fed), which has been battling inflation for over a year, is once again at a critical crossroads. With a baby step (a 0.25 percentage point increase in the benchmark interest rate) widely expected at the July Federal Open Market Committee (FOMC) meeting, divisions within the Fed over the monetary policy path after September appear to be deepening.

On the 25th (local time), Bloomberg News reported that based on recent public statements and economist surveys, Fed officials have been categorized into three groups?hawks (favoring monetary tightening), centrists, and doves (favoring monetary easing)?and that the differences in their views on monetary policy are growing.

Currently, hawkish officials including Fed Governor Christopher Waller argue for further rate hikes due to high core inflation and an overheated labor market, while dovish officials led by Austin Goolsbee, President of the Federal Reserve Bank of Chicago, warn that additional tightening could cause an unnecessary recession and job losses. Centrists, led by Fed Chair Jerome Powell, are seeking a middle ground among these positions.

The report stated, "The Fed, which had maintained a firm consensus on the need for rate hikes over the past year, is now weighing when to pause increases, leading to deeper disagreements," adding that "this division is making rate forecasts uncertain." This could not only disrupt the unified stance maintained by Chair Powell but also weaken the central bank’s credibility and communication.

[Image source=Reuters Yonhap News]

Among the Fed’s prominent hawks are Governor Waller, Loretta Mester, President of the Cleveland Fed (who does not have voting rights this year), and Governor Michelle Bowman. James Bullard, former President of the St. Louis Fed, who had led the hawkish camp advocating for aggressive tightening since the pandemic, recently resigned from his presidency and has ceased all FOMC and other monetary policy-related duties and public speeches.

Based on recent public statements, the report also classified as hawks not only Lori Logan, President of the Dallas Fed, who was previously considered a centrist, but also Neel Kashkari, President of the Minneapolis Fed, and Thomas Barkin, President of the Richmond Fed (non-voting). It particularly noted that President Logan is among the most likely to oppose pausing rate hikes in the future.

All these officials have argued that despite the Fed raising U.S. interest rates by 5 percentage points since March last year, the policy is still not restrictive enough to curb inflation. They have also suggested that tightening beyond the June dot plot, which indicated two additional hikes this year, may be necessary. Some of them reportedly expressed a desire for further hikes during the June FOMC meeting, when the Fed paused rate increases to catch its breath. Hawks have expressed concern that although the consumer price index (CPI) inflation rate has eased from the 9% range last year to the 3% range, core inflation remains high. The overheated labor market is also cited as a concern.

[Image source=Reuters Yonhap News]

The centrist group within the Fed is led by Chair Powell. Philip Jefferson, nominated as Vice Chair, and John Williams, President of the New York Fed and the Fed’s third-ranking official, are prominent centrists who publicly support Powell’s approach. Most centrists agree with the hawks that Fed tightening must continue to bring inflation down to the 2% price stability target. Chair Powell, who initially described inflation as transitory in 2021, has since led aggressive tightening and emphasized the need for further measures.

In particular, centrists argue that lowering inflation requires sustained below-trend growth and cooling of the overheated labor market. However, they also caution against excessive tightening that could push the economy into a recession. The Fed’s decision to skip a rate hike in June to assess the cumulative effects of tightening reflects this caution. This view largely aligns with that of the doves.

Finally, the dovish camp, which worries that further rate hikes could unnecessarily trigger a recession, includes Raphael Bostic, President of the Atlanta Fed (non-voting), President Goolsbee, and Governor Lisa Cook. Goolsbee, who served as an economic teacher to former President Barack Obama, is considered an influential dove even on Wall Street. The report noted that President Goolsbee is skeptical of his colleagues’ concerns about the overheated labor market. Patrick Harker, President of the Philadelphia Fed, Mary Daly, President of the San Francisco Fed (non-voting), and Susan Collins, President of the Boston Fed (non-voting), are also classified as doves leaning toward the centrist camp.

These doves emphasize that the Fed has already implemented the most aggressive tightening in 40 years by raising rates over 5.0 percentage points and that there is a lag before the cumulative effects of tightening are reflected in the real economy. The recent slowdown in inflation indicators supports the dovish view that tightening effects are becoming visible. The report stated, "Doves want to end rate hikes quickly to protect jobs. They worry that further increases will unnecessarily harm the labor market," adding that "they oppose the hawks’ focus on the overheated labor market and emphasize a soft landing."

Currently, the market has largely priced in a baby step at the July FOMC meeting, which runs from today through tomorrow. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects a 98.9% probability that the Fed will raise rates by 0.25 percentage points this month. If so, the U.S. benchmark interest rate will be 5.25?5.5%.

Investors are expected to seek additional hints about future rate policy during Chair Powell’s press conference immediately following the FOMC monetary policy statement release on the afternoon of the 26th. Later in the week, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, will also be released. The core PCE price index is expected to have risen 4.2% year-over-year, down from 4.6% the previous month.

This content was produced with the assistance of AI translation services.