Pigeonholing Fed hawks

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?

Worried about deflation? Don’t be so stupid

Posted by Alister Bull

Highly regarded Federal Reserve historian Allan Meltzer has some sharp words for journalists calling for his views on whether the United States is heading for a Japan-style bout of deflation.

“The last time somebody asked me that question it must have been the fifteenth time that I’d heard it, and I said that it must be the most stupid question I’ve heard in 40 years of dealing with the press,” he told the Cato Institute during its annual monetary policy conference this week.

“It is time that the people talking about deflation go back to school and learned about the difference between maintained rates of change and one-time changes in level,” he lectured the high-powered audience of economists, which included Fed Vice Chairman Donald Kohn and Richmond Fed President Jeffrey Lacker.