Economic First Look: A Taste of the Hawk-Dove Debate

Note: Because of the government shutdown, economic data will be on a delayed schedule. Reports are not being issued, and the data for upcoming reports are not being tabulated or collected. Below are only those reports issued by private organizations or those entities not affected by the shutdown, such as the Federal Reserve. Even if the government opens by Monday, the data for this week's calendar of reports has likely not yet been tabulated, and last week's data will be released ahead of this week's data. So, the usual schedule for government-issued economic reports will not apply.

Monday

• Consumer Credit, 3 p.m. EDT

Tuesday

• National Federation of Independent Business (NFIB) Small Business Optimism Index, 7:30 a.m.
• Sandra Pianalto, President of the Cleveland Fed (non-voter), speaks, 12:25 p.m.
• Charles Plosser, President of the Philadelphia Fed (non-voter), speaks, 12:30 p.m.

Wednesday

• Energy Information Administration (EIA) Petroleum Status Report, 11 a.m.
• Federal Open Market Committee (FOMC) Minutes, 2 p.m.

Thursday

• Chain Store Sales, released by each retailer with media tally following
• James Bullard, President of the St. Louis Fed (voter), speaks, 9:45 a.m.
• John Williams, President of the San Francisco Fed (non-voter), speaks, 2:30 p.m.

Friday

• Consumer Sentiment (University of Michigan measure), 9:55 a.m.

This week, the focus will be on minutes from the last Federal Open Market Committee meeting, due for release Wednesday. With that in mind, let's take a look at the speeches pertaining to monetary policy given by voting members on the FOMC. (There have been other speeches given by non-voting members.)

But, for the purposes of this column, we'll compare and contrast the views of Kansas City Federal Reserve President Esther George (PDF), a hawk, and Boston Fed President Eric Rosengren (PDF), a dove. These two have very different, even opposite, points of view, so they can serve to highlight the larger debate within the Fed. Note the stark contrast in their respective observations of the very same data series.

Esther George

"My overall assessment of the national economy is generally positive as the economy continues to slowly recover. I expect that we will see moderate [gross domestic product] growth in the second half of this year of about 2%. As private demand grows and fiscal drag wanes, growth should pick up over the next year."

She continued:

"More relevant than the most recent monthly employment snapshot is the change in broader labor-market conditions over the last 12 months. The unemployment rate in August was 7.3%, compared to 8.1% a year earlier. This decline far exceeds what most forecasters expected a year ago. In terms of the overall level of employment, more than two million additional workers are employed today compared to a year ago.

"Importantly, the labor market and the broader economy have continued to improve in the face of fiscal tightening. I interpret this resilience as a signal that the economy's underlying fundamentals have improved substantially. ...The official measures of inflation remain below the Fed's longer-term goal of 2%, but appear to have bottomed out. I expect inflation will begin to move closer to the target in the second half of this year and into next year as labor-market conditions continue to improve and private demand strengthens. Longer-term inflation expectations also remain anchored at levels consistent with the Federal Reserve's objective."

In a section of her speech titled, "Risks of Delayed Action," she outlines her view that stimulus tapering should begin now.

"I view the data as being sufficiently positive to continue with the plan the chairman presented in June, which called for the pace of purchases to moderate this year and gradually decline for several months until they come to an end around mid-2014. Consistent with this roadmap, our previous guidance and market expectations, my preferred course of action would have been to begin tapering asset purchases at last week's meeting."

She continued:

"Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions. Policy moves that surprise the market often result in additional volatility. And by deciding that it needs to await further data, the Committee is suggesting its desire to be 'data dependent' involves putting more emphasis on the most recent data points, which can be volatile and subject to revision, rather than on its own medium-term view of the economy. Another risk is that markets might misconstrue the postponement of action as reflecting a Committee assessment that the broader economic outlook is substantially weaker, when that is not the case."

She concluded, "An initial reduction in the pace of its sizeable asset purchases would be appropriate given the ongoing improvement in economic conditions. By gradually reducing the amount of the Fed's monthly purchases, the central bank would be providing time for markets to adjust as smoothly as possible and to resume their critical role in pricing risk and allocating credit in our economy."

Not surprisingly, she has consistently cast dissenting votes at the past several FOMC meetings, arguing that tapering should have begun by now.

Eric Rosengren

Taking the opposite point of view, Boston Fed President Eric Rosengren described why he strongly and unequivocally supported continuation of the Fed's asset-purchase program at the last policy meeting.

"Policy actions of the central bank should be rooted in and dependent on incoming data," said Rosengren. The data that the Fed's policymaking committee saw in September "did not show the progress I had hoped," he said. The economy seems to be in a "holding pattern -- just treading water rather than gearing up to make significant improvement in the still very elevated unemployment rate."

Rosengren cited factors like tepid growth in payroll employment, the declining labor participation rate, sluggish consumer spending and only modest GDP growth. In addition to the disappointing economic data, he noted the possibility of disruptions in the nation's fiscal policies and the recent rise in long‐term market rates.

Rosengren also emphasized that policy that is dependent on incoming data cannot always be "signaled" clearly in advance. "Reality doesn't always live up to our forecasts. Had U.S. fiscal matters not been so problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September. Unfortunately, those were not the facts we faced."

All this led Rosengren to believe "it would have been premature to begin reducing the rate of Fed asset purchases." Premature reduction in monetary-policy accommodation, he added, "risks slowing the sectors of the economy that have shown the greatest strength -- the interest‐sensitive sectors."

Looking ahead, Rosengren said, "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." He stressed that "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."

So these are two birds of very different feathers -- a hawk and a dove -- and comparing them makes for an excellent example of why it's easy for investors to become confused about the direction of Fed policy. When members of the central bank view the same data in very different ways, it's no wonder why we don't know what the Fed's next move will be.