When it Matters, They Agree.

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Nesting together

Given the obsessive focus on the hawk-dove debate, it is striking that when real decisions need to be made, FOMC members are virtually all on the same page. Perhaps the best example was the repeated unanimous votes in 2021 and 2022. From the fall of 2021 to early 2022 the Fed was steadily falling behind the curve. And yet all the policy votes during this period were unanimous, not a single hawk on the Committee dissented as inflation and employment surged.

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Equally impressive was the voting during the very rapid tightening from March 2022 to June 2023. This period featured four 75 bp hikes, two 50 bp hikes and five 25 bp hikes. During this period there were only two dissents, and neither was by a dove. In March, Bullard dissented in favor of a 50 bp rather than 25 bp hike. Then in June the hawkish George dissented against a large 75 bp hike—not because she had turned dovish, but because she did not like the idea of surprising the markets. Where were the supposed doves?

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This strong consensus continues to this day, including the decision to pause on hikes last July the decision to signal cuts were coming (eventually) in December and now the signal for an indefinite pause in those plans.

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Ornithology exam

Recent commentary from Fed officials suggests they are all on the same page. Here is a quiz. Which of the following statement was made by a hawk and which by a dove?:

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·????? “It will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2%”

·????? “I think it’s much more likely we would just sit here for longer than we expect."

·????? “I think now we wait."

·????? "Policy is in a very good place now.”

·????? "In the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing"

·????? “It will take longer than previously expected” for the Fed to have confidence in falling inflation to cut rates.

·????? “I’m not in a hurry to cut rates.”

·????? “We need to sit tight where we are for longer than we had previously thought.”

·????? Holding the policy rate "is prudent...as we gain clarity about the path of inflation,"

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Key: Powell, Kashkari, Goolsbee, Williams, Waller, Powell, Bostic, Barr, Barkin, Mester

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If the Fed was like the rest of Washington

It worth considering the message we would have heard at the start of this year if there was a significant division in the Committee. A true dove would have dissented in favor of an immediate rate cut:

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With six-month annualized inflation already at 2% it is time to cut. Policy operates with a lag and if we don’t cut now we are going to undershoot our target to the downside, while risking an unnecessary recession. Besides, surveys of new rents suggest that shelter inflation is going to come down soon. Indeed, should we really have a weird construct like Owners Equivalent Rent in our price measure to begin with? Drop it and inflation is close to target. ?Finally, why are we are we nailing ourselves to the cross of 2%--there are many reasons it would have been better to have a higher target in the first place.

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A true hawk would have begged to differ:

It is way too early to consider cuts. The standard twelve-month metric is still much too high. Moreover, both the trimmed mean PCE deflator and the CPI are running a lot higher than the overall PCE deflator. The long and variable lag argument is increasingly unconvincing with each month of economic and financial strength. We can’t be sure this new rent data is reliable and economic theory supports the idea of including OER in your measure of inflation. Giving up on the target with a still healthy economy would destroy its credibility and cause a major repricing of inflation expectations in the financial markets and contracts.

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Of course, if you read these speeches carefully you can find some subtle differences. Most important, the most dovish members of the Committee (and Powell) are very reluctant to acknowledge that a rate hike is plausible. By contrast, Mester is explicit: "Should developments in inflation and inflation expectations warrant it, policymakers will need to be open to tightening policy further." However, they all agree on the core ideas. Progress on inflation is disappointing. They need to see a string of softer numbers. Neither rate cuts nor rate increases are being actively considered. The growth picture will also dictate the next move.

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As I have written before, the similar views among FOMC members are primarily due to the fact they are all using essential the same economic framework and sharing the same policy goals. There has been considerable convergence in both respects in recent decades. They agree: policy works with long and variable lags via changing financial conditions; inflation is driven by a combination of supply shocks, capacity pressures and inflation expectations; and the inflation target is 2% and it would mean a major loss of credibility (and financial instability) to change it now.

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Hence most of the divergence comes down to different forecasts. That is why when the data moves the whole committee moves with it. Doves have had to concede that the road back to 2% could be quite bumpy: hawks have been ratified in that view. Hence, for now, there really are no doves.

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Of course some of the convergence—and the lack of dissents—reflects loyalty to the institution and the Fed chair. Powell seems to be particularly effective at gathering a consensus by regularly sharing views with the members. More broadly, given political pressure on the Fed, members don’t want to be undercutting the credibility of the institution. However, I would not push this too far: the main reason they agree is they have similar frameworks and the same goals.

?Chill

I have two takeaways. First, it is time to stop hyperventilating about every utterance out of a Fed official. Despite the avalanche of speakers in the last couple weeks, I don't think we have learned much of anything. It isn’t that complicated: if the economy cracks or the trip to 2% gets back on track the Fed will ease; if neither happens, they won’t ease. Second, with this strong consensus on the Committee, I don’t understand forecasts that have the Fed easing in July. Clearly, the Fed is going to need a lot of convincing.

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