Hawks and Doves at the Fed
The economist Dean Baker recalls a story about Janet Yellen, the Federal Reserve vice chairwoman, that seems at odds with the story that opensmy profile of Ms. Yellen in Thursday’s paper.
I wrote that in July 1996, Ms. Yellen was concerned that the Fed might drive inflation too low.Mr. Baker wrote Thursday that in September 1996, Ms. Yellen pressed for higher interest rates because she was concerned that inflation was too high.
The stories are both true and, taken together, do a nice job of illustrating the complexity of labeling Fed officials in general, and Ms. Yellen in particular.
The debate in July 1996 was about the Fed’s long-term goals.
The Fed’s chairman at the time, Alan Greenspan, maintained that the Fed should seek to eliminate price inflation. Asked by Ms. Yellen how he would define price stability, Mr. Greenspan responded, “I would say the number is zero, if properly measured.”
Ms. Yellen replied, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.”
The entire transcript, which is very much worth reading,is available on the Fed’s Web site.
The debate in September 1996 was about that moment in time.
Inflation was still running at an annual pace of about 3 percent, and Ms. Yellen was concerned that the pace would rise.
The former Fed governor Laurence H. Meyer tells the story as follows.
“Before the September 1996 FOMC meeting, Janet and I went to see the Chairman to talk about the policy decision at that meeting and at following meetings. This was the only time I ever visited the Chairman (at my initiative) to talk about monetary policy, before or after a meeting. Janet and I were both worried about inflation, even though it was very well contained at the time. We told the Chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through. He listened, more or less patiently. I recall, though this may have not been the case, that he just smiled and didn’t say a word. After an awkward silence, we said our good-byes.”
Ms. Yellen, in other words, did not want inflation to fall below 2 percent, but she also did not want it to rise above 3 percent. She had a somewhat greater tolerance for inflation than Mr. Greenspan, but she was more concerned that inflation would rise, so she wanted to raise interest rates.
Mr. Greenspan, by contrast, had less tolerance for inflation, but also was less concerned that inflation would rise. So he held rates steady.
Ponder this for a moment: Which one was the hawk and which the dove?
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