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.