ECON430-Topic #2: Hawks and Doves


Inflation hawks are those who oppose the Fed easing monetary policy in an attempt to stimulate the economy at the risk of increasing inflation. Jeffrey Lacker, President of the Richmond Fed, recently discussed current economic conditions with Virginia Business. Regarding the recent decision by the FOMC to keep interest rates low through 2013 President Lacker was quoted saying “I think low interest rates right now are warranted.  But I was hesitant about committing implicitly to a particular date on the calendar.”  The 2011 FOMC voting members include three dissenters to recent policy changes including Minneapolis Fed President Narayana Kocherlakota who explained his dissent as not seeing the need for more accommodative policy.


James Bullard, President of the St. Louis Fed, was quoted in the Wall Street Journal as saying reduced inflation expectations were something, “[t]hat is making me a little bit worried.” and Chicago Fed President Charles Evans, “wants the Fed to promise to keep short-term interest rates near zero until unemployment drops below 7.5% or unless inflation rises to near 3%.” Chairman Bernanke cited “significant downside risk” to the economy for the near- to medium-term.

The “Hawks v. Doves” argument is now taking on a bigger role, as Representative Barney Frank has pushed to try and end some of the dissent on the FOMC votes by trying to remove the Fed Presidents from the committee.

Questions you might consider:

  • 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.
  • Do you believe that Barney Frank is correct in what he is trying to do to make the FOMC more aligned with itself? Do you believe this would add more accountability to the FOMC? Or do you believe the Fed Presidents play an important role in forming policy? Cite some research, or opinions of other economists to support your opinion.



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

  1. Many Hawks (like President Lacker cited above), are comfortable maintaining low rates for a while, but worry about making explicit promises regarding the duration of policies and oppose further quantitative easing style stimulus. Many Hawks also note that, despite the remarkable amount of liquidity pumped into the economy, banks have failed to facilitate the types of investments which are most effective at creating jobs–preferring instead to sit on treasuries or even collect the minuscule interest rate paid on reserves held at the Fed. This puts inflationary pressure on the economy unmatched by a tangible employment and growth upside, warranting caution as further expansionary policies are debated.

    Doves, on the other hand, argue that inflation concerns must remain on the backburner until the the job situation improves. They point to the stubbornly high unemployment rate, fearing hysteresis effects in addition to immediate pain. Though the CPI rose by 3.8% over the past year, doves note that core inflation remains at a more acceptable 2%. Additionally, growth forecasts remain disappointing–the IMF predicting 1.5% and 1.8% expansions this year and next, respectively. Doves argue that raising rates now could be disastrous, and are willing to consider further measures if conditions show signs of worsening.

    While I appreciate the merits of both arguments, I would tend to advocate moderate Dove-ish policy. I agree with Bernanke’s commitment to keep rates low for two years–this reduces uncertainty and seems appropriate based on most growth forecasts. Keeping rates low into the future will be particularly important as (in all likelihood) significant spending cuts/tax increases will be enacted by a deficit-cutting Congress. However, I recognize the limited efficacy of Monetary stimulus for jobs growth in the current economic climate, and accept that inflation is a real risk which must be carefully monitored. As Lacker notes, a significant component of current unemployment is caused by a mismatch of workforce skills to high-demand jobs, a problem monetary policy can do little to remedy. For this reason, I would hesitant to say that the employment benefits of a “QE3” scenario would outweigh the accompanying inflation risk.

  2. The significant downside economic risk that the U.S. economy is faced with surely is not joy to anyone’s ears, but neither is the prospect of central bank induced inflation. But, how likely is a bout of inflation given more monetary stimulus, or downward trending economic movement given a lack of Federal Reserve action? It would seem that the goals of recent Fed policy (QE2) need to be evaluated to assess the success of its policy. If the goal of Fed policy was to remove the significant risk of deflation (sharp drop in prices), then the Fed’s actions have a very good chance of being considered a success. Core inflation figures for 2011 are up up .4% from July to August (3). On the other hand, if QE2 goals were to expand lending practices, stimulate investing, and bring down interest rates, the proof of success is not “in the pudding.” In fact, corporate and mortgage rates rose post QE2 announcement, arguably the more important rates when discussing economic growth (1).

    Interestingly, the fact that yields on treasuries have both fallen and rose since the announcement are both being heralded by Ben Bernanke as success stories for Fed policy. But, can Mr. Bernanke really be blamed for his statements? His job is to instill economic confidence.

    The obsession over inflation might be a little misplaced. Banking practices post 2008 are extremely risk-averse. The prospect of a high-return, risky loan (or even a moderate return, low risk loan) given all the extra cash held in reserves might just not outweigh the fact that bank are easily recapitalizing their balance sheets with all the extra reserve cash held at the Fed, not to mention the fact that liquidity is currently held in high regard (2). In addition, inflationary pressures that seem to be rising to the surface could theoretically be halted by contractionary Fed policy.

    In short, I agree for the most part with the president of the Richmond Fed, Jeffrey Lacker. He hinted that the Federal Reserve might be somewhat helpless in the current situation, because there are forces outside of its control hindering growth in employment, namely an issue of “skill mismatch.” It would seem like educational issues such as these might be more effectively tackled through fiscal policy, making the risk of inflation posed by more Federal Reserve action seem less and less attractive. If low skilled labor cannot necessarily continually compose the greater part of our economic performance, some policy changes need to be made to reflect this reality.


  3. I personally believe the Hawks are correct when it comes to the Federal Reserve’s next moves. Dick Fisher, the head of the Dallas Fed, believes any additional monetary stimulus will only lead to higher prices, not higher employment or economic output. Monetary policy or quantitative easing only effects real variables in the short term and the short term is over. Furthermore, Fisher argues that promising to keep interest rates at zero for two more years will likely lower business investments. He believes rising interest rates would cause businesses to start investing again, in order to lock in the low rates of interest while they’re still available.(1)

    In my opinion, the Congress under Nancy Pelosi prevented a real economic recovery from occurring, which then paved the way for quantitative easing one and two. If the original $830 billion stimulus package created 500,000 jobs a month like Joe Biden claimed it would, then the Fed’s efforts to stimulate the economy would seem more successful. I would argue that fiscal stimulus packages are actually sedatives. Government borrowing money and spending it does not create any net jobs or economic prosperity. Remember, governments can’t spend any money without first taking it from someone else, whether the money comes from taxation or robbing the private lending markets of credit, the end result is higher public debt and no net economic growth. (2)


  4. I believe that the dissenting votes are only further harming the fed’s credibility. Already people are questioning the Fed and Ron Paul for example, believes that the uncertainty the Fed causes is only helping those on wall street make profits, but those that don’t have the knowledge or ability to move with the markets their savings are stagnate or depreciating (1). With these dissenting votes it makes the public wonder if the Fed has any idea what they can do to fix the economy or if they are simply using one policy after another hoping that one will work. It is through the debates that allow the public to see this is not the case. In the August meeting they discussed the reasoning behind the decrease in the unemployment being due to the decline in the labor force (2). Through the FOCM minutes people can see that real policy is debated and explanations for the dissenting votes.

    Right now the Fed is the center of attention due to the state of the economy, but seems to be the same as any group of people of different backgrounds. I would find it strange if all members of the committee would agree as I have found that everyone has a different opinion. To fix the economy there is no recipe and the FOCM minutes clearly show that. Kocherlakota dissented because unemployment improved, while inflation had risen where Fisher dissented because he thought nonmonetary factors were limiting growth (3). The outcome of dissenting is the same, but two different reasons as to why they dissented. I believe it is not that people dissented, but the different reasons that scare the public.


  5. All eyes on the Fed has certainly been the theme as of late. Dissenting votes among the group sends mixed messages and raises the question as to whether or not the Fed has any idea what they are doing. As monetary economist Michael Woodford points out “uncertainty about the economic outlook is likely now the most important obstacle to a more robust recovery” (1). It is important to have everyone on the same page and too effectively communicate policy decisions with the intent to build confidence and reduce uncertainty.

    My opinion is more aligned with the comments from dove Chicago Fed President Charles Evans. At some point we will have to raise rates and keep inflation in check, but the Fed hawks should focus on acceleration of economic growth before tightening (2). Given our most recent GDP and inflation readings, 1.3% and 2.5% annualized respectively, we have not seen improvements in growth and economy-wide inflation has remained in the 2-3% range (3). In agreement with the doves, the low interest rates will be a key piece of the puzzle for our economic recovery, however business confidence must improve and uncertainty needs to be resolved before we see increases in investments and job creation. Where I would have to disagree with Mr. Evan’s comment is in his unemployment target of 7.5%. With so much debate surrounding what the new normal level of unemployment will be, it is unrealistic to set such a target and form policy decisions firmly around that.


  6. Hawks idea of not to ease could be very well in line with the reasoning of the real business cycles who believe that monetary policies cannot impact the supply side shocks to productivity which are more important than the demand side and monetary shocks. Also classical,new classical and monetarist they also believe that monetary policies can be used to some point and with the additional fiscal policies will be very effective to help the economy but monetary policies alone will not be that effective. According to William gross, using another quantitative easing will not help but instead will hurt credit creation. To fix the problems we are facing now we will need the to increase the incentives for American companies to create American jobs.
    Recalling Milton Friedman warning on fixing the nominal interest rate when inflation is either falling or rising by doing this could invite dynamic instability. When the nominal rate is stuck at zero it is already fixed. If inflation falls the the real interest rate will rise and therefore squeezing the economy even further. This is the recipe for deflationary implosion.
    Instead of using another quantitative easing the fed should start to work on their exit strategy as mentioned by Chairman Bernanke who outlined the major components in 2009.One of the key elements is designing extraordinary liquidity facilities. The fed incorporated features aimed at encouraging borrowers to reduce their use of financial facilities as financial conditions returned to normal.
    I think the congress inability to pass further stimulus has prevented the Fed’s effort to stimulate the economy. This is because most of the time the congress acts slow,too timidly,and in a seemingly scatter-shot way. Earlier on in the crisis, there were some worries about moral hazards and fairness. Bailing out those who caused the financial melt down. But again if they could have acted faster and left the blame game for later,I don’t think we could have been this deep in trouble.…/The_Economic_Impact_of_a_750_Billion_Fi...

    Quantitative Easing:Entrance and Exit strategies by Alan S.Blinder

  7. Even though the Hawks and the Doves both have great arguments for the current economic debate, I take the side of the Hawks in a battle of two oppositions. Hawk’s main argument is to have inflation as low as possible, in order to avoid making the damage to the economy. In addition, hawks argue that the central bank needs to raise interest rates and shrink its balance sheets to increase investments. I think that business community will take the side of Hawks, as businessmen are looking to improve the investment opportunities for the future. The stable pricing for the investment is essential for business growth. According to Andrew Lilico (hawk supporter), the chief economist of Policy Exchange, business growth will bring higher wages, and therefore higher consumption, which will further lead to the growth in the economy (1).

    Furthermore, I think that Congress has affected the Fed’s efforts to stimulate the economy. In order to have positive results, economy needs a stable financial system. According to the article by Theo Francis the Fed actions were limited by the congress during the crisis in 2009, which created other risks. The bankruptcy of AIG definitely led to other failures in the financial system (2). Therefore, Congress has created a picture that the Fed cannot be fully trusted and should be audited. The Fed’s inability to operate 100 % on their own might have prevented the Fed’s efforts to stimulate the economy.


  8. Narayana believes that more monetary accommodation is not necessary; his reasoning being that PCE inflation has risen and there has been a decrease in the unemployment level. Though the unemployment rate has dropped from 9.8% to 9.1% (1) from November (the month he chose) till now and PCE inflation has increased, it does not mean that maintaining the fed funds rate at “extraordinarily low levels” are no longer warranted.
    I believe that it is necessary, for now, to keep the fed funds rate where it is to promote lending. Lacker stated that the housing market is not contributing to growth. Therefore an increase in the fed funds rate (FFR) will only hurt the housing market more. But Naryana argued that inflation has been rising, so keeping the FFR at that level could cause further increase. I agree that inflation has increased but I don’t think that it is even at a level where we should worry about that over the level of unemployment. Lacker said that it is around 2 percent (maybe a little under) and the annualized 12-month PCE core inflation from the Dallas Fed (where one of the dissenters is President) is only at 1.6% (2) . Meanwhile unemployment is still at 9.1% (which is actually up from March 2011) and has been fluctuating around 9 percent for over a year now (it has actually increased several tens of thousands in the past few months).
    Because of my democratic ideals I believe that everyone should have a voice and that is why I don’t generally think that a dissenting opinion is bad, but I think that being the central banking system of the United States, the FOMC should not have dissenting opinions votes. I agree with Alan Greenspan’s reasoning (3) that by stating the pros and cons of a FOMC argument it brings people into the debate that don’t understand the process. Only unnecessary, uneducated debate will come about and could cause speculation in the markets.

  9. @Lyle Schiavone
    Hey Lyle,
    I agree with you that we should not set a specific target level of unemployment as to when we should stop maintaining the low fed funds rate, but I think there should be some indicator as to when we should start gradually increasing it (the fed funds rate). I think a problem too with Mr. Evan’s 7.5% cutoff is if we can even get to that again. With so many structural unemployment we may have a new natural unemployment rate at around 8-9% (that is of course if you believe in a natural unemployment rate).

  10. I believe the Fed’s credibility maybe harmed by dissenting votes, at least in eyes of the public. It might show lack of corporation between the Fed’s presidents like in Congress. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, recently revised his forecast for U.S. GDP growth from “a 3-to-3.5 percent range to less than 2 percent” for 2011. Mr. Plosser, one of the three dissenters, warned the Federal Reserve against straying from its main goal “fighting inflation.” For regular investors the message will be mixed.
    The monetary policy of “QE1” and “QE2” did not improve the growth of the economy as most economists have hoped for. Three years later, after more than $1 trillion spend on “Quantitative Easing” the unemployment rate as of October 9th, 2011 is still stubbornly high at 9.1 percent. Therefore, I agree with the Hawks like Mr. Plosser that “the Fed has reached the limits of what monetary policy can do: Even a monetary-policy maker can’t say, ‘Let there be a light’… You mention QE2, and everything goes dark.” While the goal of QE2 is to bring down long-term interest rates, it will not have a positive impact on businesses and consumers argued Mr. Plosser. “Thus, I am skeptical that this [QE2] will do much to spur businesses to hire or consumers to spend, given the nature of the structural adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad,” he said.
    The Fed alone cannot solve all the economic problems facing the U.S economy and “shouldn’t act as if it can.” Congress inability to pass another stimulus may thwart the Fed’s efforts to stimulate the economy depending who you are speaking to. A new economic system of approach is needed to help the economy recovery.

  11. Uncertainty is ultimately killing the economy. I agree with Fed president Jeffrey Lacker when he says

    “I think low interest rates right now are warranted. But I was hesitant about committing implicitly to a particular date on the calendar.”

    This was meant to send a message to investors and banks to help alleviate some of the uncertainty surrounding the credit markets, but this did little to affect the lending of banks, which is the primary focus of the Fed’s action. I believe this only put upward pressure on future inflation due to the risk that the Fed may not be able to “reign in” inflation quick enough when the banks actually decide to lend. Another reason I dissent with the Fed’s promise to keep rates low is if inflation does quickly increase what will the reaction of the markets be if the FMOC decides it needs to increase rates before 2013. Overall by pledging to keep interest rates steady, they calmed short term market jitters, but opened the door to be criticized if policy changes before then and opened the door for inflation to run rampid until 2013 if the Fed upholds its policy.

  12. LATE: As this country has seen in recent months, our elected official’s ability to make decisions and be able to vote in a bipartisan manner does not appear to be possible. With all this trouble trying to pass legislation in congress, it was comforting to know that where the politicians had failed, at least the Fed should be able to move forward confidently and pass whatever policies were necessary for the growth of the economy. Unfortunately, with 3 out of the 5 bank presidents dissenting, confidence in the Fed’s ability to make good decisions is down, which has a direct impact of the effectiveness of their policies. In the two weeks following the Fed’s announcement of reinvesting in Treasuries, the S&P Index fell 7.1% due to concern for the recovery (1). The regional presidents are typically more concerned with inflation than the job market, as this has the biggest impact on their banks (2). Richard Fisher, one of the three presidents who dissented and is considered hawk-ish, stated in a speech in June that “I cannot think of anything more damaging to the welfare of hard-working Americans who have jobs, those who are unemployed … than to have their purchasing power reduced by still higher inflation.” (3) However, with markets fluctuating as unpredictably as they are and consumer confidence being so low, the Fed needs to appear confident in the effectiveness of their policies in improving the state of the economy. Instead, dissent is casting doubt over consumers and could potentially harm future policy implementations.


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