Are you a hawk or a dove?

Observers of central bankers actions are forever trying to interpret the comments of the players involved to decide whether they are a hawk or a dove. In simple terms the difference between being “hawkish” and “dovish” is below:

Hawkish: Concerned that inflation is running to high and wish to raise interest rates, tighten credit and overall have a tighter monetary policy in order to cool down inflation.

Dovish: Concerned that inflation is not high enough or growth is not high enough. Therefore  to stimulate economic activity you must lower interest rates to make it attractive to borrowers and unattractive to savers.

The reason I speak of this as last night the FED released their minutes from their last meeting and observers picked up on what they considered to be a more hawkish tone than they are used to. The below is the area most picked up on:

“Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.”

The FED has been running on a dovish tilt since the beginning of the first QE programme 4 years ago and therefore to me there is nothing there too committed to changing this. It is however the slightest diversification away from the normally quite dovish view that caused people to sit up and take note, bearing in mind this is a process where people analyse body language, tone of voice and everything down to the colour of the tie been worn by the speaker………perhaps there is a small case of mountains and molehills here?

What this does is spook those who are involved in “inflation trades” i.e those who are long gold or short the US dollar and the instant reaction told this story as Gold got knocked and the dollar was bid higher.

If it were this easy though for the FED they would sleep better at night as they not only have to worry about inflation but also unemployment and growth ( dual mandate). The FED has stated fairly emphatically at last meeting that they would continue to stimulate the economy until unemployment rate reaches 6.5% ( currently 7.7%) so for me I will continue to think along these lines. i.e no end in sight for QE until we see a meaningful shift in the unemployment rate in the US.




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