ECON430-Topic #2: Hawks and Doves Revisited

Several months back I asked my Monetary Theory students to think about the difference between the roles of “Hawks” and “Doves” on the FOMC (http://econstudentview.aneveu.com/?p=305). Recently, the “Hawks” have been making a fair bit of noise about the FOMC’s plan to keep the federal funds rate at exceptionally low levels through late 2014. The Fed acts using discretionary policy (as opposed to rule-based policy) which means they could reverse course at some point in the future, but would do so on their own terms. If the Fed acted using a rule, they would be more constrained, but some argue that might be the best thing.

On the other hand, “Doves” like San Francisco Fed President Williams recently said that the Fed should keep their foot on the monetary “gas pedal.” In fact, if you look back at articles from 2009, 2010, and 2011, you will see that many have been predicting runaway inflation for some time. However inflation has yet to materialize for a substantial period of time, and may not if the Fed continues to target the goals they claim to be targeting. Beyond that, it may be difficult to reverse many of the changes that Ben Bernanke has helped usher in over the last several years.

Questions you might answer:

  • Do you think the recent evidence on inflation provides political ammunition for the Fed’s internal and external critics? Go back a couple of years and find some forecasts and claims for both Hawks and Doves and see how they fared.
  • Do you think the Fed’s credibility is harmed by dissenting votes? Does their message appear mixed, or do you think that the open debate within the FOMC is a good thing for policy? Cite some research, or opinions of other economists to support your opinion.
  • Do you believe the Hawks or the Doves are correct? Cite their reasoning for deciding to ease (or not ease) monetary conditions further. Do you think the inability for Congress to pass further stimulus has thwarted the Fed’s efforts to stimulate the economy? Cite some research, or opinions of other economists to support your opinion.

7 thoughts on “ECON430-Topic #2: Hawks and Doves Revisited”

  1. “Hawks” believe high future inflation can harm many, including those who hold most of their assets as savings, bonds, and checkable deposits. For one of many reasons, this is why “Hawks” believe targeting future high inflation rates should be the primary focus within the Fed’s dual-mandate. They believe low interest rates will lead to increases in the future money supply and, subsequently, inflation. “Doves” would rather keep interest rates low today with hopes to stimulate firm investment, hereby reducing unemployment–even if it means instituting more flexible inflation targets. Chicago Fed President Charles Evans agrees and says firms are holding cash rather than investing (1)—implying that rising interest rates would only exacerbate unemployment.

    Although “Hawks” and “Doves” bicker, they both seem to recognize high inflation is not ideal. Members of both groups agree that the most recent federal funds rate policy (2) should be revisited if inflation gets out of hand. “Dove” Charles Evans says a 3% inflation rate would be considered out of hand (1).

    Like Evans and other Doves, I believe it would be advantageous to prevent further loss in firm investment by keeping interest rates low. To rebuttal “Hawks” who believe inflation will inevitably follow low interest rates—the money supply has been increasing at a steady rate and independently of the Fed’s target interest rate (as witnessed in class). Up until this point, the Fed has not been carrying “Hawk” strong inflation targets, and over the past decade, inflation rates have been fairly steady around 2% (3).

    (1) http://www.chicagofed.org/webpages/publications/speeches/2011/10_17_11_mcee.cfm
    (2) http://www.npr.org/2012/01/25/145844411/fed-unlikely-to-raise-interest-rates-before-2014
    (3) http://www.usinflationcalculator.com/inflation/current-inflation-rates/

  2. I believe that going forward; the “hawks” will have an easier case to make than the “Doves” with regards to more monetary easing. Even though the “Doves” have been correct due to relatively low inflation, going forward there is an increasing risk of higher inflation. One reason price levels have remained at its current levels is due to the low velocity of money, levels not seen since mid-1990s (1). The velocity of money has continued to fall, even as the economy has begun to rebound from recession levels. If positive economic data continues to come out, and if velocity of money changes direction, I don’t think it would take much to see higher inflation given the large money supply. I agree with Dallas Fed President Richard Fisher, the reward of further easing doesn’t justify the risk of higher inflation and our problems can’t necessarily be fixed through more monetary easing. (2)

    With regards to reversing it some of the policy that Bernanke has implemented over the past few years, I don’t understand why it would be so difficult. Some inflation hawks are predicting inflation around 2.3% next year above the 2% target, and it wouldn’t seem too difficult to bring down that price level. (2) There is plenty of room to raise rates, the Fed has plenty of assets to sell, and I believe they could come up with more unconventional ways to raise rates similar to how they came up with new methods of monetary easing.

    (1) http://research.stlouisfed.org/fred2/series/M1V?cid=32242
    (2) http://www.reuters.com/article/2012/02/15/usa-fed-fisher-idUSN9E7NN02J20120215

  3. I think that dissenting opinions within the Fed can give the appearance of much internal strife and to the public it could seem that the Fed does not know what it is doing, but I believe that it will lead to more innovative and productive solutions. Many different ideas foster creativity. If all of the Fed’s president’s allied with the same school of thought then the Fed’s flexibility would be greatly reduced. With competing schools of thought prevalent at the Central Bank, the Fed will be able to react and respond to disturbances in the economy with greater insight and more comprehensive approaches. Michael McCracken is a research officer at the Federal Reserve in St. Louis and he put it best when he reported on the role of disagreement within the FOMC in October of 2010, he wrote that:
    “One of the arguments against making the regional bank presidents political appointees was that such a move could ultimately reduce the range of ideas that are debated at each of the FOMC meetings. And since “thinking outside the box” is generally considered a good thing, reducing the range of voices in the FOMC meetings seems unlikely to improve monetary policy. In other words, disagreement among the FOMC members is something we might want to see more of and not less of (McCracken).”
    A key feature of where dissenting votes from Fed presidents comes from is the way each branch of the Fed constructs their economic forecasts. According to McCracken “the FOMC forecasts are “conditional” forecasts. Specifically, they are constructed conditional on a hypothetical future path of monetary policy (McCracken). The forecasts are conditional because each President chooses the economic data they use to forecast into the future. I believe that this is beneficial to the functioning of the Fed and the economy because this type of forecasting is much like scenario analysis which corporations employ to forecast their financial statements. In scenario analysis, many inputs are changed so that the company can simulate what would happen if there were an unexpected shock to their business operations. The main benefit to this type of forecasting is the flexibility that the Fed gains from various forecasts.

    (McCracken) http://www.stlouisfed.org/publications/re/articles/?id=2023

  4. When researching further into the FOMC and the fed in general, I tend to side more with the “doves”. I believe we should engage in QE3. With QE1 and QE2 the economy saw steady growth without a huge inflationary problem. I don’t see how the “hawks” can claim that QE3 will hinder all kinds of problems with inflation. I also think QE3 is the best way to try and encourage further investment spending for firms and try to get the unemployment rate back to the natural rate. I think the hawks’ higher rates could be dangerous, especially with the growing concern and uncertainty of how the European crisis will affect us over here. If you combine the higher rates and the raising uncertainty of markets, it will create less investment and therefore a barrier to our (slow) climb back to economic prosperity. In my opinion the fed is trying to do everything they can to help the now stalled economic growth. The fed may now realize that they are backed into a corner. With the potential help from Congress and fiscal policy the fed may have a wider scope of unconventional techniques they can use, however since Congress has not been able to carry out further fiscal policy, it not only maybe directing hindering the economy, but indirectly through its externalities it presses on the FOMC.
    http://articles.latimes.com/2011/jul/13/business/la-fi-bernanke-economy-20110714
    http://dailycapitalist.com/2012/01/13/fed-doves-take-control-of-fomc-and-monetary-policy/
    http://www.ibtimes.com/articles/127742/20110328/fomc-2011-voting-members.htm
    http://www.economy.com/dismal/article_free.asp?cid=198660&src=msnbc
    http://www.nytimes.com/2011/09/21/business/economy/gop-urges-no-further-fed-stimulus.html

  5. It seems a plausible argument that dissenting votes in the FOMC harms the credibility of the Fed (and potentially the voter’s credibility as well). Politicians are often ostracized for voting out of step with their political party, which in the case of the Fed is not unlike inflationary hawks and doves. However, I think you would be hard pressed to find a regional Fed president who would not be in favor of being able to openly disagree with the chairman (who typically votes first and is often in the majority). Inflation hawks have been the most vocal as of late, and Morath notes that Richard Fisher, an inflationary hawk from the Dallas Fed, gave more speeches than anyone in 2011. However this squawking has produced little more than headlines for the twenty-four hour news cycle. This is not to say that dissenting opinions mean nothing, as it was noted that all four dissenting voters from 2011’s FOMC committee lost their voting privileges (2).
    Although the dissent may seem as though it is simply split among inflationary hawks and doves, it is interesting to note that in reality the open debate that takes place in the FOMC may be more complex, and that credibility among dissenting votes could be much greater than it actually is. Ellen Meade of the St. Louis Fed, notes in her paper The FOMC: Preferences, Voting, and Consensus that during Greenspan’s time at the Fed, although his proposals were adopted almost unchanged in the actual vote, the actual rate of dissent among FOMC voters close to 30 percent (as opposed to the 7.5 “official” dissent rate)(3). It can therefore be assumed that there is much dissent than is reported on in Bernanke’s FOMC, and that often individual preferences of the FOMC voters aren’t subsumed when it comes to the formal vote (as these are expressed and accounted for in the informal discussions that take place prior).
    (1) http://blogs.wsj.com/economics/2012/01/27/fed-inflation-hawks-moved-bond-market-most/?mod=wsj_share_twitter
    (2) http://articles.businessinsider.com/2012-01-24/markets/30658337_1_cleveland-fed-san-francisco-fed-dennis-lockhart
    (3) http://research.stlouisfed.org/publications/review/05/03/part1/Meade.pdf

  6. In times of economic downturn and uncertainty, the general public is looking toward our government and policy makers to try and restore confidence in the economy and return it back to normal. The Federal reserve is especially looked upon to make decisions that should help with this process, and it is due to the trust that our society has put in them to do just that. But what happens when these policy makers are in disagreement about how to help with the economic recovery, especially with their opinions on inflation? The dissent between Fed members is taking away from their credibility and ultimately hurting their ability to do their job. Now, this isn’t to say that every person in the Fed isn’t entitled to what they think should be the main course of action, as these debates and discussion lead to the best choices being made, but to be so public about this dissent is leading to lost faith. Inflation “hawks” and “doves” are at the forefront of this argument, and this argument is seen on almost a daily basis.

    On one side, you have the “doves”, who are ok with some inflation, calling for more monetary stimulus in order to try and speed up the economy’s attempt to return to output levels from before the crisis(1), and fight the unemployment rate that is currently at 8.3% (2), well above the 4.5-5% that was occurring in 2007. Now, it is not that the inflation “hawks” are not trying to fight this level of unemployment either, it is just that they want to do so in a way that will not jeopardize the current rate of inflation going any higher than 3%. I feel that these differing views of inflation are in fact slowing the recovery process by making necessary decisions take much longer to be made. With headlines covering these disagreements(3), it doesn’t exactly illicit confidence from the general public, when the supposed smartest minds in economics are caught in an argument over inflation, something that is so fundamental to policy making.

    (1) http://www.bloomberg.com/news/2011-06-08/bernanke-says-frustratingly-slow-recovery-warrants-accommodative-policy.html
    (2)http://data.bls.gov/timeseries/LNS14000000
    (3) http://articles.chicagotribune.com/2011-09-29/news/ct-edit-fed-20110929_1_inflation-hawks-dallas-fed-accommodative-stance

  7. I believe that the doves are correct for deciding to ease monetary conditions further. This is because the recovery the economy is experiencing has been described by many economists and policy makers as sluggish at best. The doves argue that increasing rates, or allowing them to rise without actions like quantitative easing, would be harmful to the fragile economy. Two major concerns are any lasting effects from the housing market collapse and the increasing economic uncertainty in Europe. The doves argue for continuing to allow banks to lend at such low rates in the event that they need greater access to liquidity if and when the crisis in Europe affects the US Economy. Ben Bernanke has stated recently that he plans to keep interest rates low until 2013 for not only the above mentioned reasons but also in attempt to allow the Fed to be more transparent allowing for market participants to plan for the future. He criticizes Congress for not figuring out their fiscal policies which also increases uncertainty in the economy.
    http://static.reuters.com/resources/media/global/editorial/interactives/hawks_vs_doves_js/v2_hawks.doves.html
    http://article.wn.com/view/2012/02/02/Fed_chief_warns_Congress_against_hampering_growth_while_cutt/
    http://www.voxeu.org/index.php?q=node/7133

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