Fed divisions come to light: Hawks, doves, and Powell’s balancing act

Introduction

The Federal Reserve delivered its first rate cut of 2025, but the market’s reaction has been anything but uniform. Beyond the mechanics of a 25-basis-point reduction, what traders are really debating now is the internal balance of power within the Federal Open Market Committee (FOMC). Chair Jerome Powell has positioned himself in the middle of the hawks and the doves — trying to guide policy carefully without tipping too far toward either extreme.

For investors, this tug-of-war matters more than the cut itself. Diverging voices within the Fed are shaping expectations, volatility, and ultimately the outlook for the dollar, equities, and commodities.

The hawks: Inflation still lingers

The hawkish camp within the Fed has consistently warned that inflation remains sticky, particularly in services. While headline CPI has eased from its 2023–24 peaks, the pace of disinflation has slowed, and core measures are still above the 2% target.

Several regional Fed presidents have argued that cutting too aggressively could reignite price pressures. Their line of thinking is simple: the Fed worked too hard to restore credibility to now risk giving it away. For hawks, a slow, data-dependent easing cycle is the only safe option.

In recent speeches, hawkish voices have stressed that labor costs, housing, and healthcare continue to present upside risks for inflation. That explains why markets have scaled back expectations of multiple rapid cuts this year.

The doves: Labor market weakness emerging

On the other side of the spectrum, the doves are pointing to softening labor market indicators. Last week’s jobless claims rose to 233K, and continuing claims are trending higher. Wage growth has moderated, and job openings have narrowed.

For doves, the lesson is clear: the Fed should act preemptively to avoid a sharp downturn. They argue that the risk of keeping policy too tight is now greater than the risk of doing too much too soon.

The dovish case gained traction after the latest GDP revision, which brought Q2 growth down to 3,3% from the initial 3,8%. While still healthy, the loss of momentum suggests the economy is cooling. Combined with softer PMI data, doves feel justified in calling for further accommodation.

Powell in the middle: The pragmatist

Chair Powell’s cautious tone has been interpreted as an attempt to balance these two camps. In his post-decision remarks, he described policy as “modestly restrictive,” leaving the door open for future cuts but refusing to pre-commit to a rapid cycle.

This middle-ground stance has frustrated both sides: hawks think Powell is risking credibility, doves think he is underestimating the slowdown. Yet for Powell, the objective is clear — keep optionality alive and avoid boxing the Fed into a rigid path.

Markets, however, crave clarity. Futures pricing had leaned toward two or three cuts by year-end, and Powell’s refusal to endorse that path triggered disappointment in equities and renewed flows into safe havens like gold and silver.

Market reactions: Dollar, Silver, and equities

• Dollar (USD): The DXY briefly dipped toward 102 but found support as hawkish commentary resurfaced. USD/JPY tested 147,50 before bouncing, highlighting the dollar’s resilience when global policy divergence is considered.

• Silver: Often overshadowed by gold, silver held above 42,50 $ and tested resistance near 43,50 $. The metal benefitted from Fed uncertainty, reinforcing its role as both a monetary hedge and an industrial asset.

• Equities: Wall Street initially rallied on the cut but faded as Powell’s cautious language reminded traders that the Fed is not yet in “all-clear” mode. Volatility remains elevated, reflecting the lack of consensus on policy.

Why the divisions matter

Fed policy is not just about rates — it’s about credibility and expectations. When the Committee itself is divided, markets become more volatile because guidance is less predictable.

1. For FX traders: Hawkish speeches strengthen the dollar temporarily, while dovish commentary weakens it. The tug-of-war keeps pairs like EUR/USD and USD/JPY trapped in ranges until data provides a decisive catalyst.

2. For commodities: Silver and oil thrive on uncertainty. The lack of consensus inside the Fed has amplified flows into hard assets.

3. For equities: Investors are forced to trade tactically rather than position for a long-term policy trend. Every Fed speech becomes a tradable event.

Looking back: A familiar pattern

This is not the first time the Fed has been split. In 2019, before the pandemic, divisions also emerged when inflation was soft but global risks were rising. Powell’s approach then was similar — incremental adjustments, careful communication, and an insistence on data dependence.

What makes 2025 different is the scale of the uncertainty. Inflation has eased, but not convincingly. Growth is slowing, but not collapsing. That “in-between” status makes it harder for Powell to unify the Committee and harder for markets to price the path forward.

Trading implications

• EUR/USD: The pair remains capped below 1,1250. Only a dovish surprise in the upcoming PCE reports or Fed minutes could unlock higher ground.

• USD/JPY: Intervention risks linger as the pair holds near 147,50. Hawkish Fed commentary could keep it afloat, but any dovish pivot would invite a deeper correction.

USD/JPY (Renko chart) tested the 147,50 support (WS61) after failing at 148,00. A bullish divergence in the stochastic hints at a possible short-term rebound, but the broader trend remains heavy as Fed divisions keep the dollar under pressure.

• Silver (XAG/USD): Watching 43,50 $ resistance. A breakout would target 44,50 $, while failure keeps the metal in consolidation.

• S&P 500: Faces resistance near 5.350. Without a clear Fed signal, equities are likely to chop sideways, vulnerable to data shocks.

Personal take: A Fed that reflects the economy

To me, the divisions inside the Fed mirror the divisions in the economy. Inflation is not dead, but growth is not roaring either. Hawks and doves are both right — and both wrong — depending on which slice of data you emphasize.

Powell’s pragmatism is frustrating for traders but necessary for a central banker. He is trying to keep the Fed’s credibility intact while acknowledging real risks on both sides. The cost is market volatility, which, ironically, may be the one constant traders can rely on.

As long as this internal split persists, expect choppy ranges in FX, stop-and-go rallies in equities, and steady bids in safe-haven metals. For disciplined traders, this environment is challenging but full of opportunity.