Data Gives Doves The Upper Hand On The FOMC

The minutes of the September Federal Open Market Committee meeting were released today and the differences among the members could not be clearer. From the hawks, "A few participants referred to historical episodes when the unemployment rate appeared to have fallen well below its estimated longer-run normal level. They observed that monetary tightening in those episodes typically had been followed by recession and a large increase in the unemployment rate." The doves responded, "others judged this historical experience to be of limited applicability in the present environment because the economy was growing only modestly above trend, inflation was below the Committee's 2 percent objective, and inflation expectations were low--circumstances that differed markedly from those earlier episodes."

Once again, the data seems to be on the doves side. The September unemployment rate actually moved back up to 5% primarily due to more workers re-joining the labor force. This is evidence that there is still some slack in the jobs market which reduces the chances for an overheating economy and rapid inflation, the hawks' perpetual fear. The doves see no reason to raise rates when the labor force participation rate is growing and there are potentially millions of unemployed workers out there who could re-join the jobs market. With inflation still running below the Fed's 2% target, the doves would much prefer to focus on the agency's often-forgotten second mandate - full employment.

As Tim Duy points out, the current makeup of the voting members of the FOMC are overwhelmingly in the dove camp. There is still a lot of data to absorb between now and the meeting in December but if they data continues to show a growing labor force and below-target inflation, the expected rate hike may even be in doubt. As Duy says, the doves "want to let this rebound run for as long as possible".