Hawks and Doves, China's Two Sessions

In this Issue:

  • Bird Watching At The Federal Reserve
  • The Changing Face(s) Of The FOMC
  • China Has Plans

My life B.C. (before COVID-19) included frequent barbecues. As I was preparing the grill one afternoon, I noticed something streaking across the sky toward the backyard. It was a hawk; in the blink of an eye, it scooped up an unsuspecting critter and disappeared almost as quickly as it had arrived. After that, I was especially careful to protect the sausages we were going to enjoy for dinner.

Hawks are aggressive birds of prey. Doves, by contrast, are docile vegetarians. The depiction of doves as signs of peace dates from biblical times (one carried an olive branch to Noah); the use of the term “hawk” to describe someone who is more forceful dates from the late 18th century.

In more recent times, the contrast between the two fowl has been employed to describe the inclinations of central bankers. When inflation was raging at a double digit pace in the late 1970s, monetary “hawks” favored aggressive measures to tame it. “Doves,” by contrast, were more likely to favor an easy policy that would support economic growth and employment.

The U.S. Federal Reserve meets next week to discuss monetary policy. The extremely accommodative stance taken recently has led some to call this the most dovish Fed in decades. (And as the following article suggests, it may become even more dovish over the next year.) Its willingness to keep the spigots fully open is alarming some, but cheering others.

A bit of background is in order. While most of the world’s central banks seek to manage inflation, the Fed is the only one also tasked with pursuing maximum employment. Traditional thinking has held that the two elements of this “dual mandate” aren’t easy to reconcile: at times, it is hard to achieve one without retreating on the other.

Weekly Economic Commentary - 03/12/21 - Chart 1

But this “Phillips Curve” mode of thinking has not held up well in recent years, as the United States has simultaneously experienced low inflation and low unemployment. Further, the notion that inflation is everywhere and always a monetary phenomenon has also come under question as the linkage between money supply growth and changes in the price level has weakened. Two central tenets that have informed Fed policy for decades are no longer as helpful.

Of course, the pandemic is testing all kinds of economic identities, leaving policymakers little to go on. The sudden shifts in fortune, and the magnitude of government efforts aimed at stabilizing conditions, have been unprecedented. Central banks around the world have facilitated the relief efforts by purchasing immense volumes of government bonds and promising to keep interest rate levels low. The collaboration with fiscal authorities, while entirely necessary, has raised concerns about central bank independence; the Fed now owns $4.8 trillion of Treasury securities, more than 20% of the total held outside of the government.