People who comment on monetary policy often use a convenient shorthand to refer to the different factions within the Federal Reserve and other central banks. There are the inflation hawks, who are more inclined to fight inflation through higher interest rates, and the inflation doves, who are less worried about inflation and more concerned about unemployment.
But these labels may be all wrong, argues Standard & Poor’s chief economist Paul Sheard in a persuasive new report. Indeed, the traditional labels could even be pernicious in the way they frame things, such that those who want to tighten policy are the Tough People Who Do What Needs to Be Done, and those who want to ease policy are hippie-dippies. As former Dallas Fed president Robert McTeer once said, "Only hawks get to go to central banker heaven." But there are times when that kind of rule of thumb can lead to exactly the wrong policy.
And we have been in one of those times for the last five years in the major Western nations, and Japan has been there for the past two decades. Deflation, or falling prices, is no picnic, and have been a bigger threat than inflation in that period. The old bird-based classification system of central bankers isn't terribly helpful in that world.
“I don’t think that Ben Bernanke is an inflation dove,” said Sheard in a meeting with reporters Tuesday. “He’s a deflation hawk. I suspect he would be a hawk on inflation as well if that were our problem right now.”
It’s a worthwhile distinction. For example, right now St. Louis Fed President James Bullard has established himself as one of the Fed’s leading deflation hawks, dissenting at the last policy meeting because he thinks inflation is too far below the Fed’s 2 percent target and that the central bank should be doing more to bring it back up.
I would add another dimension to Sheard’s analysis. There also exist people who are “bubble hawks” — that is, people who are constantly on the lookout for financial imbalances building and want to use monetary policy tools to help address them. Kansas City Fed President Esther George and Governor Jeremy Stein fit that mold among current Fed officials.
There’s no question that some central bankers persistently seem to favor easier money while others persistently favor tighter. But the right answer isn’t always the same. Good central bankers adapt their stance for the environment they find themselves in.
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.
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.