Are You a Dove or a Hawk?
Fedspeak: Unpacking the Language of Fed Policy Analysis
Key Takeaways
The Federal Reserve’s dual mandate focuses on maintaining price stability and achieving maximum employment.
The terms “dovish” and “hawkish” describe the Fed’s policy stance, balancing economic growth and inflation control.
The Fed monitors key economic indicators like unemployment to guide policy decisions.
Understanding the Fed
Understanding specific words and phrases the Federal Reserve (Fed) uses can be challenging. Here are some common terms explained in plain language to help you better follow Fed policy decisions.
Federal Reserve vs. FOMC
The U.S. Federal Reserve is the central bank of the United States. The Federal Reserve System includes the seven-member Board of Governors, 12 regional banks and the Federal Open Market Committee (FOMC).
The FOMC sets and conducts monetary policy. It typically meets eight times a year.
The Fed analyzes various economic signals to make key policy rate decisions throughout the year.
The Fed’s Dual Mandate
The Fed faces a critical balancing act of pursuing two crucial goals: keeping prices stable and employment plentiful. This dual mandate requires the Fed to foster the highest level of employment while targeting a 2% annual inflation rate.
With two significant goals to achieve, Fed officials have a more complicated assignment than other monetary policymakers. Most other major central banks have a single mandate — to promote price stability. The health of the job market isn’t a key consideration or a monetary policy driver.
Price stability is essential to supporting a healthy and growing economy. A healthy economy needs a thriving labor market to provide goods and services and maintain growth. Everything the Fed does relates to this dual mandate.
To keep the U.S. economy healthy and stable, the Fed promotes:
Maximum Employment
Achieving the highest level of employment the economy can sustain without adding to inflation.
Price Stability
Targeting a 2% annual inflation rate (adopted in 2012 by the FOMC).
An economy with low and stable inflation provides business-friendly conditions for planning, saving and investing, which results in a growing economy. A growing economy needs workers to produce goods and services.¹
A Lens on Employment
The Fed measures the job market's health by looking at lagging economic indicators. While these metrics tell us what has already happened in the economy, they can also highlight prevailing trends. These include:
Unemployment Rate: The percentage of people actively seeking but unable to find work. A lower rate suggests higher employment, which leads to stronger consumer spending power that drives economic growth.
Labor Force Participation Rate: The percentage of people working or actively looking for work. A decline could indicate a longer-term structural-demographic shift due to aging populations.
Job Openings and Labor Turnover Survey (JOLTS): The number of unfilled positions, hires and quits. Conducted by the U.S. Bureau of Labor Statistics, JOLTS looks closely at labor market dynamics, providing a snapshot of workers moving in and out of markets and unfilled jobs. The Fed uses JOLTS to measure the labor market's strength and help gauge what’s to come. For example, more job openings than job seekers reflect a tight market. This backdrop turns the Fed’s attention to inflation, as firms may need to pay higher wages to attract workers.
Wage Growth: The increase in wages or salaries over time, usually expressed as a percentage. Rising wages indicate a strong economy with a risk of higher inflation.
Checking the Pulse of Inflation
Price stability means that inflation remains low and stable over the longer run.2 The Fed keeps an eye on inflation in several ways. It closely watches the following indicators, with a strong focus on personal consumption expenditures (PCE), to develop a comprehensive view of price trends:
PCE: Financial barometer that measures overall consumer spending, adjusting for changes in buying habits and a broader range of goods and services. It’s the Fed's preferred inflation measure because it:
Measures the change in the price of goods and services for all households rather than just urban households.
Covers a wider range of goods and services and adjusts to changes in spending habits (like substituting expensive brands for cheaper ones).
Includes data collected from businesses, such as employer-provided health care benefits.
The Fed uses the annual change in PCE to assess progress toward its 2% inflation target.
Consumer Price Index (CPI): Financial thermometer that tracks price changes for consumers in urban centers for a specific basket of goods and services. To understand the difference, compare a grocery price list from last year to one from today.
Producer Price Index (PPI): Measures prices from the point of view of producers of goods and services. If goods and services cost more to produce, producers are more likely to pass on price increases to consumers. PPI is an early-warning inflation indicator for consumers.
Inflation: Sometimes referred to as headline inflation, it reflects rising prices for consumer goods and services. Core inflation excludes volatile food and energy prices.
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Decoding Fedspeak: Your Cheat Sheet for the Market
To move the economy toward maximum employment and stable prices, the Fed will adopt a policy stance to influence market interest rates. You might hear “hawkish” or “dovish” and wonder what they mean. We’ve made a cheat sheet to decode common terms you might hear when the experts discuss the FOMC and its decisions.
Doves vs. Hawks
Debate within the FOMC occurs between members considered more lenient on monetary policy (the doves) and those who favor a stricter policy (the hawks). The Fed uses extensive data analysis to develop a stance to achieve its dual mandate amid changing market conditions.
Policy Stance | Dovish | Hawkish |
Plain English | Dovish policy prioritizes economic growth and employment. It tolerates higher inflation to support these goals. | Hawkish policy favors inflation control. It accepts slower economic growth to stabilize prices. |
Fedspeak | • Accommodative | • Restrictive |
Characteristics | • Lower interest rates | • Higher interest rates* |
Intended Result | • Boost economic growth | • Temper overheated economic growth |
Market Interpretation | • Signals concerns about recession risks or weak economic activity | • Signals concern about overheating or inflation risks |
*Watch for a seemingly contradictory hawkish cut when policymakers lower interest rates but signal fewer future cuts than previously guided. This occurred at the Fed’s December 2024 meeting, when policymakers announced a 25 basis-point rate cut and a more hawkish outlook.
The Fed's Monetary Policy Toolkit
After the FOMC sets policy, the Fed uses its monetary policy toolkit to enact the policy and ensure that market interest rates are at levels consistent with the FOMC’s target policy rate and dual mandate.3
Federal Funds Rate: The target short-term lending rate is the primary tool the Fed uses to achieve its policy goals. It’s the rate banks pay each other for overnight borrowing in the federal funds market.4 The FOMC sets the target range’s upper and lower limits, which have been consistently 0.25 percentage points apart.5
Discount Rate: Interest on short-term Fed loans to banks, or how much it costs banks and other commercial institutions to borrow. The discount rate acts as a ceiling for the fed funds rate as the rates are normally relatively high relative to other interbank borrowing rates. The Fed sets this rate, and a higher rate represents a more restrictive policy.
Open Market Operations: This allows the Fed to fine-tune the nation’s money supply on a regular basis by buying and selling government securities to implement its policy. When the Fed wants to boost the money supply and spark borrowing, it buys securities to inject more money into the economy. If the Fed aims to shrink the money supply and reduce borrowing, it will sell securities.
Quantitative Easing (QE): While open market operations are routine actions, QE is a non-traditional, last-resort tactic the Fed uses to add money to the system under unusual circumstances. When the Fed needs an additional tool to stimulate the economy and encourage investment, it buys securities (typically government bonds) on a massive scale in the open market. This strategy is designed to reduce borrowing costs and encourage businesses to invest.
Quantitative Tightening (QT): QT is a tool the Fed uses to remove money from the system and normalize the Fed balance sheet. When the Fed wants to reduce the amount of money in circulation and tame escalating inflation, it can sell securities or allow maturity bonds to roll off. This tactic lifts the supply of bonds and leads to higher interest rates.
Forward Guidance: The Fed communicates its intentions about the course of monetary policy through forward guidance, including the direction of rate increases and bond purchases. This approach provides transparency about the Fed’s plans and helps manage market participants' expectations.
Data Dependence: In a less predictable environment, the Fed may favor “data dependence.” This concept allows the Fed to adjust future policy rates depending on incoming inflation and economic data.
The Fed aims to achieve its dual mandate of maximum employment and price stability by adjusting these levers.
Steering Toward Positive Economic Outcomes
As inflation and economic growth rise and fall, the Fed must constantly reassess its policy to steer the economy toward the best outcome. Due to the complexities of maintaining balance, the Fed needs to adjust its tactics and the tools it deploys based on how the economy and markets respond.
Overheated Economy
An economy with strong growth and mounting inflation. Here are some key terms you’ll hear associated with an overheated economy:
Soft Landing: The economy and inflation slow down without causing a recession.
Hard Landing: Policy intended to tame inflation leads to a recession.
No Landing: The economy grows, and inflation remains above target despite efforts to slow them down.
Goldilocks Economy – Just Right …
A Goldilocks economy is neither too hot (inflationary) nor too cold (recessionary).
Recession
A recession is a significant decline in economic activity that officially lasts two consecutive quarters.
Stagflation
Stagflation is a rare but challenging environment of high inflation and tepid growth.
This exhibit illustrates the relationship between inflation and economic growth and their role in defining the economic scenario we experience. For example, a combination of low economic growth and high inflation could create stagflation, while high economic growth and low inflation might lead to a Goldilocks scenario.
Source: American Century Investments.
Understanding Fed Policy Is Crucial for Making Informed Financial Decisions
Regularly scheduled FOMC meetings throughout the year conclude with a vote on the stance of monetary policy. Most notably, this includes a decision about whether the FOMC will adjust the target for the federal funds rate. These announcements can move markets and impact your savings and investing decisions, so we think it’s prudent to be informed.
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Federal Reserve Bank of St. Louis, “Making Sense of the Federal Reserve: The Fed and the Dual Mandate,” accessed January 15, 2025.
Ibid.
Federal Reserve Bank of St. Louis, “Making Sense of the Federal Reserve: How the Fed Implements Monetary Policy with Its Tools,” accessed January 16, 2025.
Board of Governors of the Federal Reserve System, “What is forward guidance, and how is it used in the Federal Reserve’s monetary policy?” last updated July 19, 2024.
Federal Reserve Bank of St. Louis, “Making Sense of the Federal Reserve: The FOMC Conducts Monetary Policy,” accessed January 16, 2025.
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