Dom’s Quick Take: Policy Transmission Lags Main Dividing Line Between FOMC Hawks and Doves

The pre-FOMC blackout starts on the weekend, and all this week hawks and doves have been marking their policy positions. The main dividing line is on whether the full impact of Fed tightening has already been transmitted to the economy. 

Waller argues it has, based on three things:

1. Most models show 18 to 24m lags.
2. Effective tightening actually started in Q4 2021, 6m ahead of the first hike, when 2yr yields started to price tightening.
3. Economic agents are likely to have reacted faster this time than in previous cycles because the hikes have been much larger and faster.

Therefore, says Waller, ‘we can’t expect much more slowing of demand and inflation’.

Dallas Fed President Logan also thinks most of the impact of policy tightening has come through. She notes that ‘the last major tightening of financial conditions came around the September 2022 FOMC meeting’, that the housing market has bottomed out, and declares herself ‘very concerned about whether inflation will return to target in a sustainable and timely way’. To Logan’s point, the GS FCI is back to its level of August 2022, when the FFR was 2.5%. 

By contrast, the doves, e.g., Goolsbee, Bostic and Daly, while expressing their faith that the full impact of monetary tightening has yet to come through, do not really discuss the reason for their beliefs. Bostic knows because ‘that’s what our contacts are telling us.’ Goolsbee believes that ‘weaker inflation data shows the Fed is making progress’.

Regarding the FOMC, most speakers agree on a further hike this month, the hawks are sticking to the June SEP’s two additional 2023 hikes, but all agree that the next policy steps will be data-dependent.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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