Must-know: Interpreting FOMC statements

Part 3

Hawks and doves: Why Fed-watching isn’t for the birds

The FOMC is made up of hawks and doves, and their balance could affect future policy

Like bird-watchers, investors who follow the Fed need be able to tell the differences between a hawk and a dove. “Hawkish” FOMC members are more concerned about the Fed’s low inflation mandate, and “dovish” members are more concerned about the Fed’s high employment mandate. Since the Fed makes decisions by committee (Bernanke only gets one vote), the balance of hawks and doves on the board determines whether future policy will be expansionary or contractionary (lead to higher or lower nominal growth) relative to current policy.

2013 11 01 infla unempEnlarge Graph

The current voting members of the FOMC are listed at the end of their post-meeting press release. Right now, nine of the voting members are considered dovish and one (Esther George) is considered hawkish.

Voting members rotate annually, potentially changing the balance of hawks and doves

In 2014, voting rights on the FOMC will rotate among regional Fed presidents. Three dovish voters—Evans, Rosengren, and Bullard—will be replaced by three potentially hawkish voters—Plosser, Fisher, and Pianalto. This will shift the balance of doves and hawks from nine-to-one to six-to-three. The FOMC has historically strived for consensus, so this shift could lead to less expansionary policy in the future—a clear risk for stocks.

In the end, though, the main question is how will all of this affect your stock portfolio? Read on for an analysis of the relationship between asset prices and monetary policy.

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