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Monday, April 16, 2012

Fed Watch: On Labels

Tim Duy:

On Labels, by Tim Duy: I generally follow the convention of referring to monetary policymakers as "hawks" or "doves." But what really do these terms mean? Are they appropriate or meaningful distinctions? On this topic, Cleveland Federal Reserve President Sandra Pinalto says:

I’ve been part of the Federal Reserve for a long time, more than 28 years. Those labels actually came into play when there wasn’t agreement around an inflation objective. There were some members of the Committee who felt a higher rate of inflation was appropriate. Those individuals were dubbed doves. And there were some that felt that we needed a lower rate of inflation. In fact, one of my predecessors, Lee Hoskins, was focused on achieving zero inflation. And he was considered a hawk.

We now have agreement and a statement by the Committee that 2 percent is the appropriate level of inflation. So I don’t think the titles of hawks and doves are useful when the Committee has stated that we have a 2 percent inflation goal.

If there are titles that people want to use, I would like to be labeled someone who is open-minded. Or someone who is pragmatic...

Pinalto's point is that now that the FOMC has settled in on a 2% inflation target, there is no distinction between hawks and doves. Is this true?

I see her point, but would offer some caveats. First is that perhaps we could consider the entire FOMC as hawks relative to a more dovish policy such as a 4% inflation target. Second is that Chicago Federal Reserve President Charles Evans has supported aggressive policy even if inflation rose as high as 3%. this would seem to be a contradiction to Pianlto's claim that there are no hawks or doves; Evans certainly appears to be a dove relative to the 2% inflation target.

Also, the 2% target is not written in law. Will this become a litmus test in Senate confirmation hearings for Federal Reserve governors? The lack of distinction between hawks and doves might simply be a transitory affair if future policymakers have different views - or the economy necessitates different views.

These issues aside, I still think Pinalto's point is well taken. So how should we use the terms "hawks" and "doves" at a time when most policymakers have coalesced around the same target? I tend to think of the distinction in terms of the policymaker's inflation forecast. A hawk is a policymaker who perceives a greater upside risk to the inflation forecast and thus anticipates policy will turn tighter sooner than later. On the other side, doves tend to see less upside risk to the inflation forecast, or even downside risk, and thus do not anticipate a tighter policy in the near term. (Of course, you could argue that labels are not necessary to begin with, which may be true, but I think will ultimately occur as a means of identifying the different positions of policymakers).

To be sure, these are state contingent labels. Deeper into a tightening cycle, a hawk would be a policymaker more inclined toward further rate hikes, a dove less inclined. And during an easing cycle, a dove would be inclined to cuts rates sooner and perhaps more deeply. But in either case, the distinction between a dove and a hawk is the relative timing and or pace of policy changes necessary to achieve the 2% inflation target.

Bottom Line: The hawks/doves distinction has lost some of its original interpretation as the Fed settles in on a 2% target. That said, policymakers still have different interpretations of the appropriate policy path given their economic forecast, and those interpretations can separate policymakers into camps that can still be labeled (for ease of exposition rather than a normative judgement) as generally hawks or doves. In general terms then, a hawk sees current policy as more likely to be too loose than too tight, a dove sees vice-versa, thus imparting some information about the relative views on policy direction. But Pinalto's final point also defines what we really want in a policymaker - an open-mind, rather than one entrenched in a particular vision of the economy regardless of the realities of the data. A policymaker who might be a hawk or a dove as circumstances change.

    Posted by on Monday, April 16, 2012 at 05:41 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (11)


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