Fed Watch: Hawks and Doves, Again

Neil Irwin argues that the classification of Fed policymakers into hawks and doves is too simplistic, and, of course, he is correct.  He concludes:

In other words, maybe instead of classifying central bankers by the variety of bird they most resemble, we should instead judge them on their ability to adapt their thinking to circumstance.

That said, I doubt we are going to change this convention anytime in the near future.  We can, however, better define the terms to at least reduce the negative connotations associated with either identifier.  I use the terms to refer to a policymaker’s judgment as to the appropriate level of monetary accommodation given the current and expected economic situation.  A “dovish” policymaker tends to view the economy as likely needing more monetary accommodation than a “hawkish” policymaker.  Similarly, if I say the risk is that tomorrow’s FOMC statement will sound “dovish,” it means that it will suggest a greater amount of monetary accommodation relative to the last FOMC statement.  I think this is a refinement of my thoughts the last time I tackled this subject:

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.

As Irwin points out, a policymaker might not be hawkish because of the current inflation risk, but because of risk of financial instability.  Thus, it is more appropriate to use the terms to refer to a policy outlook rather than the specific reason (such as inflation, deflation, financial instability, etc.) for that outlook.

The key is that the terms hawks or doves refer to a perception about the appropriate path of monetary policy, and it is possible – and desirable – that the perceive path changes as the economy changes.  In other words, a policymaker could be “dovish” at one point in the business cycle, and “hawkish” at another.  If the FOMC turns “hawkish” in the near future, we can expect less accommodation (or even tighter policy), which is what we would expect if the economy were accelerating.

This definition does not imply that “hawks” or “doves” have different inflation targets, which I think is an outdated classification.  On that basis, there are no such things as hawks or doves – the FOMC has already quantified their objective of 2% annual PCE inflation over the longer run.  Even the Evan’s rule is not technically at odds with that objective; it merely allows the Fed to reach that objective from above, making clear that actual inflation will likely be within a range around 2%.  In other words, the target is not a ceiling.

So when we learn that the doves, and specifically Vice Chair Janet Yellen, have been better forecasters than the hawks, we should not conclude that those favoring a higher inflation target have been correct.  We should conclude that those who favored additional monetary accommodation on the basis of their forecasts were correct.  Those who favored relatively less accommodation based on their forecasts were incorrect.

The hawks/doves distinction has returned with the great debate over who should take the helm of the Federal Reserve when current-chairman Ben Bernanke steps down.  Sadly, there is an effort to paint Janet Yellen in a negative light because she is a “dove” and thus will favor higher inflation, the debasing of the currency, cats and dogs living together, etc.  This is the negative connotation associated with the outdated definition of hawks and doves.  The attack on Yellen takes an ugly turn in the Wall Street Journal:

Janet Yellen, the current Fed vice chairman, has emerged as the favorite of the Democratic left. As an economist with long experience at the Fed, she doesn’t lack for professional credentials. But her cause has been taken up by the liberal diversity police as a gender issue because she’d be the first female Fed chairman.

Nancy Pelosi has bellowed her support, and Christina Romer, who was chief White House economist for the first two years of Mr. Obama’s Presidency, has all but said it would be a defeat for women if Ms. Yellen doesn’t get the Fed job. That led our friends at the New York Sun to wonder if they had somehow missed the creation of “the female dollar” given that they thought the Fed’s main task is to preserve the value of the currency.Ms. Yellen is also seen, in and outside the Fed, as a leading monetary dove. That isn’t limited to her backing for Mr. Bernanke’s monetary interventions since the 2008 panic. We’ve followed Ms. Yellen for 20 years and can’t recall a key juncture when her default policy wasn’t to keep spiking the punchbowl. Many Democrats think the Fed needs to keep interest rates at near zero through the 2016 election, and Ms. Yellen is their woman.

I suppose we are supposed to infer that all women are at heart dovish policymakers bent on debasing the US currency.  I think Kansas City Federal Reserve President Esther George would disagree.  And I am not sure how you read this passage without realizing the case against Yellen is, at its core, nothing more than sexism.  Moreover, I am not sure how you read this column and not realize the ignorance of the author.  Regarding the punchbowl comment, Neil Irwin, unsurprisingly, has a better recollection of the past twenty years:

For example, Janet Yellen, the current Fed vice-chair, is viewed in markets as an uber-dove because she has been a strong advocate of the Fed’s unconventional monetary easing to try to help the job market. But it wasn’t always so. Larry Meyer served as a Fed governor with Yellen in the 1990s. In 1996, the two of them had concluded that the Fed needed to raise interest rates to fight the threat of inflation. They went to Alan Greenspan and told him of their concerns, threatening to dissent at a future meeting unless there was  a rate increase. They lost the argument, but it is a sign that while Yellen may be a dove right now, the same would not be true in all states of the world.

I also have followed Yellen for the better part of 20 years and never for a moment considered her a dove relative to the old, outdated definition.  If anything, I would have considered her a hawk relative to the current 2% target.  Recall that she was an early advocate of numerical targets.  From 2005:

…I find myself still pretty comfortable with the numerical objective I had recommended almost a decade ago. More specifically, I would now favor a 1.5 percent numerical objective for inflation as measured using the core personal consumption expenditures (PCE) price index, which, given the recent average differences in measurement bias, corresponds to a 2 percent objective for the core CPI. If the stability of my own views on the appropriate numerical inflation objective is representative, it seems likely that the FOMC’s numerical inflation objective would probably change fairly little over time due to economic factors.

If you assume that core and headline rates converge to the same over time, than at one time Yellen favored what could be considered a relatively more hawkish stance regarding the appropriate rate of inflation.  The next year she suggested that even lower inflation was acceptable:

I see an inflation rate between 1 and 2 percent, as measured by the core personal consumption expenditures price index, as an appropriate price stability objective for the Fed.

But what she has not changed her view on achieving that outcome within the structure of the dual mandate:

However, I also think it is critically important that a numerical inflation objective not weaken our commitment to a dual mandate that includes full employment. Therefore, I would see the numerical objective as a long-run goal, and would want the Committee to have a flexible timeframe within which to maintain it. We’ve done a good job under Chairman Greenspan of promoting both price stability and full employment. I believe that a numerical long-run objective for inflation will enhance our ability to maintain that success even in the face of the significant challenges that may come up.

Yellen doesn’t view an inflation target as being inconsistent with achieving full employment.  And guess what? She has been right.  The current pursuit of full employment certainly has not fueled inflation.  But if it did, if the 2% target was in jeopardy, I am confident Yellen would act accordingly.  Indeed, I think she would surprise those who deride her as a “dove.”

Bottom Line:  The classification of policymakers into hawks and doves is unfortunate given the negative connotation associated with doves in particular.  It is even more unfortuate that Yellen has been identified as a dove innumerable times in the press and blogs (myself included).  I don’t know that we can easily abandon the terminolgy, but we very much need to work to eliminate any negative connotations to the terms.

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