The Politics of Fed(merica)


Many people follow US politics, and inherently understand shifts in the electoral balance between Republicans, Democrats, liberals, conservatives, etc. The Fed is also “political”, but in a different way. Due to the preponderance of inflation targets, and the “interest rate approach” to monetary policy, you have a dividing line between inflation “hawks”, and inflation “doves”…and if you don’t keep up, you’re missing out!

Another dove flies away. Donald Kohn, the Vice Chairman of the federal reserve board, has announced that he will step down come June, leaving the board shy three members.

Mr Kohn is one of the last remaining dove governors. Another dove, Frederic S. Mishkin, resigned in August 2008. The other governor whose seat is still empty is Randall S. Kroszner, who stepped down in January 2009. (Mr Kroszner, who made few comments directly on monetary policy, was no dove: his most remembered statement on rates at the beginning of the financial crisis was unmistakably hawkish).

Left on the board are Ben Bernanke, Elizabeth Duke, and the recently appointed Daniel Tarullo, all centrists, and Kevin Warsh, a moderate hawk. The four rotating voting reserve bank presidents have left the hawk/dove balance of the board little changed from last year; the committee still has one strong hawk (Hoenig rather than Lacker), one centrist (Bullard rather than Evans), one centrist leaning dovish (Pianalto rather than Lockhart), and one dove (Rosengren rather than Yellen).

Matthew Yglesias laments that Obama should fill the vacant FOMC chairs, presumably with “doves”. Unfortunately, I don’t think that changing the tide of monetary policy is as easy as Yglesias imagines. Outwardly, the Fed believes that it is doing all it can. Quite confusingly, earlier in the recession, Janet Yellen even made the statement, “We should want to do more.” And nary a day can pass without the Fed reminding us that it is committed to “low rates for an extended period”. Which, of course, should be read: “我々は失敗しました。” (“We failed”. Get it…Japan? Clever, huh?).

Unless some “radical” thinkers like Paul Krugman, or Scott Sumner, or even Brad Delong (or Matthew Yglesias?) were placed on the board…the status quo will likely remain. The FOMC is where good monetary theory goes to die [Ex.1A: Ben Bernanke]. The difference between populist rhetoric in politics and monetary policy is that the “populism” in monetary policy is the consensus opinion among economists.

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