Hawks vs. Doves at the Fed

by: IPE at UNC

by Kindred Winecoff

Remember last month when Ryan Grim wrote a terrible article arguing that the Fed had taken over the entire economics profession and didn't allow dissent? I went ballistic on him at the time, but it now appears that his timing couldn't've been worse. First was the "saltwater" vs. "freshwater" argument started by Krugman that showed that economic theory is not as unified as Grim makes out. But now we see deep divisions within the Fed, even at the top levels:

Fissures are developing among policy makers at the Federal Reserve as they debate how and when to start raising the benchmark interest rate from its current level just above zero. ...

But Fed officials have hinted at new disagreement in recent weeks. The arguments go beyond the traditional split between hawks, who worry that easy money will stoke inflation, and doves, who contend that unemployment is the top problem.

Indeed, the Board of Governors looks to be very divided and it is unclear where Bernanke stands. Then again, maybe they're just being cagey:

RBS Securities (the firm formerly known as Greenwich Capital) mentioned an interesting article by well respected research firm Wrightson in which Wrightson posits that some of the recent hawkish comments by Federal Reserve officials are a shot across the bow of leveraged speculators. Wrightson makes the salient point that if the trajectory of rates is unclear then leveraged positions are not such safe bets.

Perhaps. But I don't believe it. Fed officials are very aware that it takes a very long time for Fed actions to trickle through the system: one quarter to two years for output, and one to three years (or more) for inflation. So they are shooting at a moving target that is in the future. There is plenty of uncertainty, and thus plenty of room for debate. The Fed doesn't want to stifle employment in the short- to medium-run, but they also don't want to spike inflation and re-inflate another bubble. It's a tightrope act, made difficult by the Fed's dual mandate.

This is a historical division: the hawks are concerned about inflation and the doves are concerned about unemployment. For what it's worth, in this case I'm with the doves. I think the medium-run unemployment worries are much more concerning than the possibility that inflation goes up to 4 or 5% for a year or so.