Pigeonholing Fed hawks

May 16, 2013

Richard Fisher, the Dallas Fed’s outspoken president, is happy to be labeled a monetary policy hawk. After all, he sometimes quips, “doves are part of the pigeon family.” That may be so. But thus far, the doves have had the upper hand in the policy debate – and the economic data appear to bear them out.

Fed hawks like Fisher have warned that the U.S. central bank’s prolonged policy of low interest rates and asset purchases risks a future spike in inflation. Yet despite the Fed’s aggressive efforts, inflation is actually drifting lower, not higher, suggesting there is something to the dovish notion that there is still ample slack in the U.S. economy following a lackluster recovery from the historic slump of 2007-2009.

Regional Fed hawks tend to argue that the Fed should not overreach in its efforts to bring down unemployment because the only thing it can really control in the long-run is inflation. Says Jeffrey Lacker, president of the Richmond Fed:

In contrast to inflation, which over time is determined by central bank actions, real economic growth and labor market conditions are affected by a wide variety of factors outside a central bank’s control.

So what should we make of the recent decline in the Fed’s preferred measure of inflation to just around half of the central bank’s 2 percent target. Has the Fed lost its ability to influence consumer prices, or is it just not trying hard enough?


Justin Wolfers, economist at the University of Michigan, thinks it’s more the latter:

They say that they’re going to set monetary policy in a way that ensures future inflation will be 2.0 percent. Right now, they expect it to be lower than that, and unemployment to be unconscionably high, so the Fed’s own framework says that they need to take more stimulative action.

Lacker, however, told reporters on Wednesday he believes the decline will be transitory given relatively stable inflation expectations.

The Fed cut official interest rates to effectively zero in late 2008, and is on track to buy over $3 trillion in Treasury and mortgage bonds. Despite those actions, its favored inflation gauge, the Personal Consumption Expenditures (PCE) price index, has fallen to a 3-1/2 year low of 1.0 percent. And according to the Fed’s own forecasts, inflation is likely to remain short of the central bank’s target for years.

Meanwhile, unemployment, while down considerably from its crisis peak of 10 percent, remains historically elevated at 7.5 percent, with long-term joblessness a particularly acute concern.


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