Tuesday, August 5, 2008

Doves RULE hawks DROOL!

Who'd a thunk it?

Man bites dog? 98lb weakling beats up weightlifting champ. Nerd gets prom queen. Just think of the other oxymoron headlines this one ranks with.

No one has named any athletic team 'the Doves.' There are the Atlanta Hawks. Doves are not fighters. They are peacemakers. And i don't mean that as a reference to the old western six shooter also called a 'peacemaker' or 'widowmaker'. No this is like Gandhi (no team named after him either).

But after this FOMC meeting everyone knows that DOVES HAVE TEETH, well figuratively speaking, please - no emails from orinithologists.

Of course the doves are more powerful with a tail wind, especially if it's a hurricane-force wind. And dropping oil prices had that sort of force on the markets. While there was speculation about how many dissents we might have had at this meeting (like how many angels can stand on the head of a pin, anyway?) we had only one.

And at what cost did the Chairman 'buy their acquiescence' with the majority? Did he make the language really hawkish? Did he compromise a lot? No. He compromised very little. The statement is on balance DOVISH. I guess all those pre-meeting stories of all that hawk angst were off-base.

Look at our story 'When doves cry' below. What we saw in train one day before the meeting was a growing tail- wind supporting the doves after the hawks had come to power and were being undermined. That in fact is the story of the August 5th Fed meeting.

Still Plosser has been on a bit of a an anti-inflation war path (Fed will have to hike rates sooner rather than later). And Stern has been inflation-wary himself. But the breakdown in oil prices took the burning need out the hawk's stance. Plosser is more of an ideologue than Stern but even Plosser stepped back from the slippery slope of dissent. So we were left with Fisher as a fixed dissent (since he feels that the last cut was unwise, he apparently will protest it as long as he is a voter or until something fundamental changes). As such that dissent is without much policy impact.

It is both interesting and reassuring to see that something as simple as lower oil prices could re-unite the committee. The fact that the statement tells us that Bernanke did not have to cut deals with verbiage to gain consent is a telling sign that the Fed sees energy prices as the problem. AND left to go on long enough some were coming to fear that the Fed's steady hand was not enough. But high energy prices were certain to be their own undoing through their impact on demand. What has happened here was in fact inevitable. Thankfully it happened before the Fed was forced to hike rates to fight the threat that undermined itself: high oil prices. Now we wait to see if oil prices will continue to move lower and how much time we have bought for ourselves. With any luck it could be a lot.