Federal Reserve chair nominee Janet Yellen (Photo by Robert Galbraith/Reuters)
Federal Reserve chair nominee Janet Yellen went before the Senate banking committee during her confirmation hearing on Thursday, and it appears that her nomination to lead the central bank will go forward. But what do we actually know about her views relative to those of other Fed officials? Some new research helps to quantify that and tells us some other surprising things about the views of Fed appointees.
The research is by Julio Suarez, who was until recently a senior economist for BBVA Research in Colombia. I spoke to him by e-mail about his findings.
How did you go about measuring the views of Fed governors?
Julio Suarez: I looked at all board members that have ever served on the Federal Reserve’s Federal Open Markets Committee (FOMC), including both regional bank representatives and appointed members. I recorded how they had voted in every non-unanimous vote from 1937 to October 2013. Then I used a statistical technique to estimate their “monetary ideology.” To my knowledge this is the first measure that uses objective FOMC votes. The measure generates an estimate of each member’s location on the monetary ideology spectrum and a sense of the uncertainty around this estimate:
What is this measure capturing? What do dove and hawk mean in this context?
J.S.: “Monetary conservatives” refer to “inflation hawks” who won’t tolerate inflation growing above the long-term target of 2 percent. “Monetary liberals,” or “doves,” are board members willing to accept higher inflation to achieve greater economic output. For example, a dove would tend to favor maintaining quantitative easing and interest rates at zero for some time to come, while a hawk would tend to favor increasing interest rates right now to avoid increasing inflation next year. Other market analysts have attempted to predict board members’ ideology, like Thompson Reuters. My results are similar to theirs (a correlation of +0.4), although with some differences. For example, I cast current FOMC representative from Kansas, Esther George, as more hawk than [Richmond Fed President Jeffrey] Lacker or [Philadelphia Fed President Charles] Plosser.
Federal Reserve Chairman Ben Bernanke and Janet Yellen seem very similar, based on your measure.
J.S.: Before her testimony yesterday at least some analysts thought Yellen was more dovish than Bernanke, but afterwards virtually all analysts are surprised at how similar both sound. But while Bernanke and Yellen have been seated together, their FOMC votes have been astonishingly similar.
You can also chart the views of Fed members over time. How do the views of the average Fed member change?
J.S.: I find that the ideology of the median Fed member is correlated with inflation and the “output gap.” The output gap is the difference between observed GDP and potential GDP, where potential GDP is the output that the economy achieves when using all its capacity. An economy growing below potential, like the U.S. since 2008, normally demands lower interest rates.
Ideology of the average Fed member compared to the output gap as a percent of GDP
Average member ideology and yearly changes in inflation
This means that the economy might depend on the prevailing “monetary ideology.” For example, under [former Fed Chairman Paul] Volcker’s mandate, most Fed board members were inflation hawks who introduced a contractionary monetary policy stance to allow inflation to drop from 14 percent to around 2 percent, despite the resulting negative output gap. On the other hand, Bernanke’s board, more dovish than any board since 1936, was confronted with an astonishingly negative output gap and are maintaining an expansionary stance as perhaps the economy demands. Volcker was the perfect hawk for lowering inflation but not the person we need right now. Bernanke (and Yellen) are the perfect doves for using monetary policy to address the negative output.
Do the views of appointed Fed members depend on the party of the president who appointed them? You’d expect the Democratic appointees to be more dovish, right?
J.S.: Actually, the differences are modest at best.
Recently they don’t look much different at all. When you take the average member appointed by a Democratic president and the average member appointed by a Republican president, you observe what you expect: Since 1936, Democratic appointees are slightly more dovish than Republican appointees, although the difference is not statistically significant. The average score for a Democratic appointee is -0.22 vs. -0.08 for a Republican appointee.
What else has this research suggested to you about the Fed’s politics?
J.S.: It seems that the Fed has avoided the same kind of polarization you see among elected officials. Perhaps that is because the Fed is a more “analytic” institution and non-monetary ideologies do not factor into FOMC’s decisions. Whether people like it or not, the FED seems like an island, or an economic monastery.
All data is available upon request. A summary will be published next month at ANIF’s Carta Financiera, a Colombian think tank.