Unlike most central banks, the Federal Reserve has what is known as a dual mandate: to foster full employment and stable prices.
Generally speaking, doves are thought to focus more on full employment at the expense of inflation and, theoretically, hawks are more willing to accept higher unemployment for the sake of stable prices.
Of course, in reality, everyone is in the middle somewhere, since no one wants high unemployment or runaway prices.
The market has understood that the Fed will wind down their bond-buying program, known as quantitative easing, by the end of this year.
The question that the market has obsessed over for the last year has been, once QE is done, when will the Fed raise rates?
In recent months, as economic data in the US has improved, the hawks have been gaining ground, saying that unemployment is ‘good enough’ and that the Fed should raise interest rates before inflation shows its head (there’s none in sight, but you never know).
In a more nuanced sense, the hawks are also saying that we should return to normal interest rates because the current Zero Interest Rate Policy (ZIRP) is distorting markets and artificially keeping asset prices above their fair value.
The big news out of the minutes, though, is that the doves are gaining ground with a slightly new argument – we should also be concerned about what’s going on overseas and how that impacts the value of the dollar (click here for more on dollar strength).
In recent days, the increase in the value of the dollar has hurt expectations for third quarter earnings – that’s the bad news. The good news, for consumers, is that the rising dollar will reduce the cost of buying imports and put downward pressure on commodities.
Both of those factors should curb inflation, which gives the doves a little more ammunition to keep rates lower for longer.
The doves also appear to be saying that we shouldn’t just be concerned with our recovery, but should also consider the slowing growth overseas. In other words, if we raise rates (which would also cause the dollar to rise), how will that affect the rest of the world?
A few years ago, the Fed was clear that it would raise rates regardless of the impact on emerging markets, but this argument seems to be broader to include developed countries (especially Europe).
For the wonky Fed watcher, the last part of the minutes that received a lot of attention was the internal debate about their internal language, more specifically, the phrase ‘considerable time.’
They have said for a, ahem, considerable time, that they would keep rates at zero for a considerable time after the bond buying program ends this month.
They want to drop that term, perhaps at the next meeting and get away from a time-based phrase in favor of something that will show that they really are data dependent (to use another Fed phrase).
In the minutes, they thought that changing the language today might send the wrong message, although looking at what happened in the markets, I would say that it was received loud and clear.