A Dovish vs Hawkish Fed
The Fed concluded its fifth scheduled Federal Open Market Committee (FOMC) last Wednesday and delivered a mix message that caused a late day sell off on Wall Street.
Before we get into what happened at the meeting, and why the markets did not like the outcome, I want to address two terms that are said all the time in the media, but not many people understand its meaning. Those terms are: “the Fed is dovish” or “the Fed is hawkish”.
When the Fed is dovish it signals that it will act to help sustain or stimulate economic growth. When the Fed is hawkish is signals that it will implement monetary policy that will slow down the economy. The Fed has a difficult job in that it wants the economy to experience growth, but not too fast because it can lead to inflation. They also don’t want the economy to stall because it can lead to a recession.
Wall Street loves to use animals as metaphors for economic and market forces. The dove is a symbol of peace and growth, and in some cultures, its tradition to release doves after a wedding ceremony to wish the newlyweds good luck. In that same context, by lowering rates, a dovish Fed policy makes it cheaper to buy a home, purchase a car and pay down debt, which helps the economy grow.
On the contrary, the hawk is a symbol of power and dominance, known for having a strong grip. When the Fed is hawkish, it increases rates to tighten the grip on economic inflation. This causes business and consumers to cut back on spending and subsequently slows down the economy.
That brings us to Wednesday’s FOMC meeting. As the market expected, in a dovish approach, the Fed lowered interest rates by .25%, but in a hawkish tone during the press conference, Chairman Powell said they did not have a predetermined plan to continue to lower rates. The market wanted a clear dovish message by the Fed that they will continue to lower rates to provide steam to our economic expansion.
With a mixed message, the equity markets sold off and the U.S. 10-year government bond yield decreased. To make matters worse, the president sent a message that he plans to increase tariffs on another $300 billion of Chinese imports by 10% starting in September. This caused the market sell off to continue Thursday and pushed down the U.S. 10-year treasury bond to levels we have not seen since 2016.
Today we will get another important piece of economic news, which will help us determine the health of the economy. Tune in to Fox Business News today at 11a PST to watch Robert Luna, Surevest CEO and Chief Investment Strategist, discuss the job numbers and what it means to your investments.
– Luis Galdamez, CFA, CIPM, CFP®
Managing Director – Investments