With their control over rates, reserves and credit, central banks have an outsized role in influencing national economic power. Today, one of their most important tools to fight inflation is raising their benchmark policy rate, called the interest rate. As the foundation for borrowing costs and returns on savings, this rate significantly affects consumer spending and economic activity. Each mode policy meeting, often presided over by a chairman or president, reinforces the idea that members are to build consensus among their fellows. Doing this allows them to choose the path of least resistance.
Members promoting higher rates, known as “hawks,” do everything they can to advance this agenda. Proponents of a more dovish tendency disposition—the so-called “doves”—help shape public discourse about inflation and interest rates. Hawks seek to maintain inflation at or slightly under 2%. Doves favor lower interest rates to boost overall economic activity, even if it leads inflation to rise just over the target. The economic conditions today couldn’t be more different than what was seen in 2022 with inflation hitting record highs.
The Role of the Chairman in Policy Meetings
As with any central bank’s policy meeting, with the possible exception of the Fed, the chairman or central bank president occupies a key role. They are entirely responsible for maintaining an active discourse and making sure that every member of the group gets a chance to express their views. Developing that consensus will be key. It provides an aligned, cohesive front for communicating tricky or tough decisions to the voting public and capital financial markets.
If there is a tie vote, the chairman or president makes the deciding vote. This affords them outsized power over both the politics and the substance of what monetary policy will look like. This power is especially critical when there is a stark divide in views on the part of hawks and doves. The ability to navigate these differing viewpoints is essential for maintaining stability within the central bank and fostering confidence in its decision-making processes.
In the week leading up to a policy meeting, most central banks observe a blackout period. In this period, jurors are prohibited from discussing their opinions publicly. This protocol doesn’t begin the day of the meeting — it starts several days before and continues on even after the new policy has been revealed. This short recess allows members time to think deeply about their vote without external voices weighing in. As much, if not more, significant than that is its goal to prevent market speculation from affecting their decisionmaking.
Hawks vs. Doves: Diverging Perspectives on Inflation
That divide between hawks and doves is the first fault line, and it’s the one that marks a real, substantive disagreement on how to handle inflation. Hawks tend to emphasize controlling inflation above all other priorities. They’re betting that raising interest rates will do the trick by rewarding savers and discouraging too much spending. Their goal is to maintain inflation at 2% target. This commitment to long-term price stability is absolutely essential to create the environment for sustainable economic growth.
Doves tend to favor a more accommodative stance on monetary policy. They push for lower interest rates and more affordable lending. This strategy is designed to increase levels of economic activity, particularly during times of weak growth. Doves like to see some inflation sandbagging, with inflation often overshooting their 2% target. In fact, they argue, moderate inflation does foster higher levels of investment and consumption.
This debate at the heart of central banks has gained further urgency as policymakers have had to consider our current economic reality. Global supply chain disruptions due to the pandemic, shifts in the labor market, and changing consumer behavior have all contributed to a complex inflationary environment. This story is a world apart from what we faced back in 2022.
The Current Economic Landscape
The context around inflation today is very different than last year’s experience. In 2022, central banks worldwide grappled with skyrocketing inflation rates fueled by pandemic-related supply chain issues, increased demand as economies reopened, and geopolitical tensions that disrupted markets. In reaction, numerous central banks forced to increase interest rates in a hawkish pattern to control inflation.
The current situation presents new challenges. Supply chains are continuing to stabilize, and consumer spending patterns are continuing to shift. Central banks should be more concerned than ever with how their policies will impact inflation as well as economic growth. Members still have to determine whether further rate increases are warranted. They need to weigh the merits of taking a more accommodative stance.
The animated debate between doves and hawks today is a testament to these complexities. Hawks are understandably concerned about possible inflationary pressures that could accompany an economic recovery. These considerations don’t mean that they oppose all measures to introduce some nominal growth trend into prices. Doves emphasize the need to cultivate that growth in times of tumult. Many caution about the dangers of an overly aggressive series of rate hikes that might undermine the nation’s economic momentum.