Are the doves dishonest?

During the 1970s, the doves were consistently wrong, and for the most part denied they were wrong, even after the fact.  Inflation (they said) was caused by “non-monetary” factors.  Now we all know that was hogwash; NGDP was rising at 11% per year.  And non-monetary factors like oil shocks and strong unions have no impact on NGDP.

Since 2008 it’s been the exact opposite, the hawks have been consistently wrong.  There is no shame in being wrong, but it is shameful not to admit you were consistently wrong in the past, when the facts clearly suggest you were.  Oddly, Benn Steil and Dinah Walker now think it’s again the doves who are at fault.

Do Fed doves and hawks get their aviary classifications based on their cold, hard analysis of data, or is it the reverse – do they select data points to justify their dovish or hawkish perspectives?

The history of the Fed’s post-crisis focus on unemployment suggests the latter.  After June of 2013, as the figure above shows, the Fed’s estimate of the natural long-term unemployment rate begins declining in sync with the decline in the actual unemployment rate.  This suggests that FOMC members are lowering their estimates of the natural rate of unemployment to justify keeping interest rates at zero longer than they could if they stuck by their initial estimates, the 6% consensus upper bound of which is now above today’s actual 5.9% rate.

We cannot test this hypothesis directly, by checking each member’s estimate history, because the estimates are anonymous.  But we can check whether the phenomenon can be explained merely by a change of FOMC composition: it cannot. The distribution of participants’ estimates shows conclusively that some of them have indeed revised their estimates lower.  Given that these are supposed to be estimates of the long-term natural unemployment rate, this is more than curious.

With core PCE inflation, the Fed’s preferred inflation measure, running at 1.5%, still comfortably below the Fed’s 2% long-run target, there is little compelling reason to begin hiking rates immediately.  But given its upward trajectory from 1.2% at the start of the year, there is surely now reasoned cause for bringing forward the Fed’s old September 2012 calendar-guidance of zero rates through mid-2015 – which the Fed doves are still strongly wedded to.

Our observations suggest that monetary dovishness and hawkishness are often fixed states of mind, rather than artifacts of a consistent approach to data analysis.  If so, there is reason to fear that the Fed’s exit from monetary accommodation will be too late and too tepid – with the result being higher future inflation than the market is pricing in right now.

Obviously it’s possible they are right, but it seems extremely unlikely.  The doves have good reason to delay their estimate of the optimal time to raise rates; the markets are suggesting that we are not approaching the Fed’s multiple policy targets as quickly as the unemployment numbers would suggest.  If 5.4% really was the natural rate of unemployment, then there is no way the 5-year TIPS would be plunging rapidly below 2%, and the 10 year T-bonds would be 2.3%.  After all, we will be at 5.4% unemployment in about 5 months.  Once we fall below the natural rate, the standard model (i.e. the Fed’s model) says inflation should rise.  But there are no signs that inflation will rise.  Steil and Walker cite historical data, but market inflation expectations are much better.  It’s not a good idea to try to steer the car by looking in the rear view mirror.  It’s not wise to second guess market forecasts.

Unfortunately we lack a NGDP futures market, which would have made it much easier for me to make this argument.  The government and the economics profession deserve ridicule for the fact that this market does not exist.

I do agree with the first sentence of their final paragraph, and have a new post on that topic over at Econlog.  But I draw the opposite conclusion—it’s the hawks we need to fear.



33 Responses to “Are the doves dishonest?”

  1. Gravatar of Joe1 Joe1
    12. October 2014 at 05:31

    Good post Scott. One question though… in the absence of a NGDP futures market wouldn’t the TIPS be an adequate marker – not just for inflationary expectations but also the direction the TIPS is veering over a period of time?

  2. Gravatar of Peter K. Peter K.
    12. October 2014 at 05:38

    I agree with Robert Waldmann that the markets are probably overshooting in their inflation expectations. The Fox News/CNBC/Wall Street Journal nexus has been screaming about hyperinflation any day now for years given the Fed’s balance sheet and “super loose” policy. This has probably seeped into the market’s consciousness.

    The conservative bubble is actually helping Obama and Yellen by raising inflation expectations.

  3. Gravatar of Morgan Warstler Morgan Warstler
    12. October 2014 at 06:26


    Is the ANY data that would make you say:

    Digital deflation means that 1% inflation is the new 4% inflation.

    I know in your mind, inflation is inflation.

    But ultimately, some jackass is saying that free digital stuff isn’t worth money. And if free is better than something with a price tag, and that is the new rule, we need to start questioning if money illusion matters.

    If people EXPECT free stuff (things with little of no nominal value) to be awesome, that by definition OFFSETS money illusion, no?

  4. Gravatar of TravisV TravisV
    12. October 2014 at 06:36

    Hey Morgan!

    Steve Randy Waldman likes you!

  5. Gravatar of Daniel Daniel
    12. October 2014 at 07:53

    Peter K,

    It must be really hard for you to accept that the market knows things you don’t.

  6. Gravatar of Negation of Ideology Negation of Ideology
    12. October 2014 at 07:53

    Fantastic post Scott, both here and at Econlog. I was also neutral in the 90’s and a dove after 2008. (I wasn’t old enough to have a position in the 70’s, but I obviously agree with the hawks of that time.)

    I think the issue is that if you’re always a hawk or a dove, then you’re probably thinking emotionally rather than based on logic and the facts. Gold bugs are notorious for this, they were almost all hawks during the 80’s and 90’s when gold was consistently dropping, from about 850 to about 270. And they’re hawks now even though gold has dropped from about 1900 to about 1200. I don’t know many people who are always doves though. People accuse market monetarists, MMTers, Keynesians of always being doves but that’s not correct. They all recognize that it’s necessary to tighten when we’re above target, they just disagree over the means. I suppose the people who were doves in the 70’s would qualify as perma-doves.

    In any case, we should just pick a target (preferably NGDPLT) and use that as our standard.

  7. Gravatar of Mike Rulle Mike Rulle
    12. October 2014 at 07:55

    I wonder what the standard error of the mean is for inflation measurement. After all, the measurement of inflation is a model, not really an objective fact. While I can easily accept there is a difference between 8% measured inflation and 2% measured inflation, I have a hard time believing that one can say there is a meaningful or any difference between 1.5% and 2% measured inflation. Yet our monetary central planners think they can so tightly steer such a result. The analog on the fiscal side is measuring the so called multiplier on deficit.

    This is why I am a bit of an ideologue. Less government spending and involvement in economic activity, wider range of inflation (or NGDP) targets, way less regulations, etc. Yet I unfortunately believe such wishes on my part are wasted energy.

  8. Gravatar of Mike Rulle Mike Rulle
    12. October 2014 at 07:57

    “on deficit spending”

  9. Gravatar of Jason Smith Jason Smith
    12. October 2014 at 09:45

    If the estimates of the natural rate were Bayesian then a falling unemployment rate likely will influence your estimate of the natural rate (making it lower).

    As an aside, it depends on what one considers non-monetary factors regarding 1970s inflation. It doesn’t seem to be in line with the long run monetary trend:

    … Maybe human behavior (expectations)? If that’s part of monetary factors or not is a more model dependent.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. October 2014 at 10:46

    All of this would be moot if it hadn’t been for the Housing Cause Denialists. Who are having another very bad day at VoxEU;

    ‘…banking today consists primarily of the intermediation of savings to the household sector for the purchase of real estate. The core business model of banks in advanced economies today resembles that of real estate funds: banks are borrowing (short) from the public and capital markets to invest (long) in assets linked to real estate.

    ‘By contrast, nonmortgage bank lending to companies for investment purposes and nonsecured lending to households have remained stable over the 20th century in relation to GDP. Nearly all of the increase in the size of the financial sectors in Western economies since 1913 stems from a boom in mortgage lending to households and has little to do with the financing of the business sector.’

    Which has been deliberate policy by government. Especially in the U.S.

    ‘…We find that, as a byproduct of the boom in mortgage lending, household leverage ratios (mortgage debt divided by the value of the housing stock) have increased substantially in many economies over the 20th century…. Put differently, household mortgage debt has typically risen faster than asset values, resulting in record-high leverage ratios that potentially increase the fragility of household balance sheets and the financial system itself.’

    Don’t miss the graph that shows mortgage lending surpassing business lending in the 1990s. That’s about the time we got legislation from Barney Frank, George H.W. Bush, Bill Clinton and Newt Gingrich weakening lending standards for mortgage lending.

  11. Gravatar of Gordon Gordon
    12. October 2014 at 13:57

    Scott, what did you think about the recent comments from Stanley Fischer and John Williams? They seem to be trying to get out the message that any rate increase will only happen with clear signs that the economy is improving. Do you think they’re trying to counteract the comments from Fed hawks like Plosser and Richard Fisher?

  12. Gravatar of benjamin cole benjamin cole
    12. October 2014 at 15:30

    Excellent blogging. The CPI-U for Dallas, with a strong labor market, is 1.2% July YOY. The CPI tends to run 0.50% higher than PCE.
    My point? Demand-pull inflation harder to obtain these days, certainly through labor markets.

  13. Gravatar of BC BC
    12. October 2014 at 15:36

    Short-term TIPS spreads may be low for supply-side reasons. Long-term TIPS spreads may reflect a belief that, even if the Fed is late in raising rates, they will eventually realize their mistake and overcorrect. Of course, that expectation of what the Fed does in the future once inflation starts to appear may rely on an expectation that the hawks prevail. If the doves have their way, then the market expectation of the Fed’s future correction will turn out to be wrong.

    I don’t necessarily believe the above story, but I’m just throwing it out there as one explanation that hawks could advance without ignoring market expectations. This points out the problem with inflation relative to NGDP. With inflation expectations, it’s hard to separate supply side from demand side.

  14. Gravatar of ssumner ssumner
    12. October 2014 at 18:16

    Joe, No, the TIPS are not a reliable indicator. The AS vs. AD shock problem.

    Peter, No, the markets pay no attention to that idiocy.

    Morgan, Just ignore inflation.

    Negation, The doves of the 1970s included many big name Keynesian economists.

    Patrick, Good points.

    Mike, I’m not sure there is a true rate of inflation.

    Jason, If not money, what?

    Gordon, I haven’t seen the comments, but your interpretation sounds plausible.

    Ben, Good point.

    BC, Those inflation expectations are conditional on a monetary policy path that the markets expect to be even more “dovish” than the Fed. I.e. a longer period before rates rise.

  15. Gravatar of Morgan Warstler Morgan Warstler
    13. October 2014 at 07:05

    Scott, ignore Money Illusion.

  16. Gravatar of Matt McOsker Matt McOsker
    13. October 2014 at 08:12

    One nit. Oil imports skyrocketed during the 70’s. By about 5-6 fold. From just over 1 million barrels per day to over 6. Isn’t trade a part of the GDP formula? So oil can affect GDP (shocks may or may not). But note that the increase in imports, and the price of those imports was probably a drag on NGDP in the seventies.

  17. Gravatar of mpowell mpowell
    13. October 2014 at 08:20

    It is apparently always easy to argue that inflation is just around the corner. But even worse, their whole argument is based on the false premise that a person’s estimate of the natural long term unemployment rate is fixed and should not be revisited based on new data. It is perfectly plausible that members of the fed have been lowering their estimates based on the fact that unemployment has been dropping towards their old estimates and they don’t see any evidence for inflation pressure, especially in wages where you would expect to see it. You can find such arguments credible or not, but it is a non-starter to argue that this is evidence of a data-impervious mindset.

  18. Gravatar of maxk maxk
    13. October 2014 at 08:54

    Great set of posts: this post, the post on EMH, and the post at Econlog about hawks and doves. I apologize for my earlier complaint that you don’t complain enough about the monetary hawks who are the principal roadblock to more expansive policy.

    Although, in the interest of clear communication I would have preferred that the headline of this post was something like: “The Hawks are the problem” or at least, “Are the Doves Dishonest? No!” I think you have a tendency to tread lightly on one side and not the other. For example, in your Econlog post you repeatedly characterized the stance of ECB hawks as corruption (or else gross incompetence). But you don’t use the same terms for current Fed hawks. Why not? Do you think the case is that different?

  19. Gravatar of TravisV TravisV
    13. October 2014 at 09:56

    “Fed’s Evans Sees Slow Inflation Rise, Counsels Patience On Rate Decision”

  20. Gravatar of TravisV TravisV
    13. October 2014 at 11:42

    Doesn’t this indicate that oil is experiencing a bigger decrease in demand than an increase in supply?

    “Airline Stocks Are Getting Smoked”

  21. Gravatar of TravisV TravisV
    13. October 2014 at 12:09

    Dear Commenters,

    Does everyone generally agree with this new analysis by Christopher Mahoney?

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. October 2014 at 12:20

    ‘France’s “big state” threatened its social policies because there will not be “enough money to pay for it in the long run”.’

    Who said it, Margaret Thatcher or a French Nobel Prize winner?

    Answer here;

  23. Gravatar of ssumner ssumner
    13. October 2014 at 14:42

    Matt, No, imports are not part of NGDP. No effect.

    Maxk, I’ve certainly said lots of awful things about Fisher. But the cases are a bit different, as inflation is considerably higher here, and the problem is further confused by our dual mandate. But I’ve certainly said the US hawks were wrong.

    TravisV, Thanks for the links.

    Patrick, Even the French socialists are having second thoughts.

  24. Gravatar of Matt McOsker Matt McOsker
    13. October 2014 at 15:00

    Scott so this GDP formula is wrong:

    GDP = C + G + I + (X – M)?

    Net exports?

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. October 2014 at 15:16

    Well, Scott, some French economists seem to want to relive The Great Leap Forward (or maybe their training of the Khmer Rouge);

    ‘The cleansing effect of the minimum wage in China’

    Which is, in all seriousness (without a scintilla of self-awareness?);

    ‘Low wages reduce the cost of not adopting the best production processes. In some developing countries, the absence of minimum wage might thus give incumbent firms little incentive to adopt more efficient but also more costly technologies or management practices; they might also allow some inefficient firms to survive.

    ‘In line with this intuition, our results show that in a fast-growing economy like China, there is a cleansing effect of labour market standards. Minimum wage growth allows more productive firms to replace the least productive ones and forces incumbent firms to become more competitive, these two mechanisms boosting the aggregate efficiency of the economy.’

  26. Gravatar of Matt McOsker Matt McOsker
    13. October 2014 at 15:44

    I might add to my formula question that I am not trying to be absolute – yes net exports can be a wash with a rise in consumption. But, if my consumption is the same and I substitute my consumption of a domestic for a foreign good, then that should be a drag.

  27. Gravatar of TravisV TravisV
    14. October 2014 at 05:45

    “Government Bond Yields Are Plunging Around The World”

  28. Gravatar of Major.Freedom Major.Freedom
    14. October 2014 at 06:17


    Stocks are considered overvalued all around the world?

  29. Gravatar of ssumner ssumner
    14. October 2014 at 07:49

    Matt, That formula is correct, and shows that imports are not a part of GDP. Only domestically produced goods count. Imports show up in that formula as a plus and an equal minus, netting out to zero.

    Patrick, That doesn’t sound promising.

  30. Gravatar of Matt McOsker Matt McOsker
    14. October 2014 at 08:27

    IMO the trade deficit is the amount of demand that is going overseas rather than being spent here. United States income that is not creating demand in the United States, and that lost demand must be made up by private sector or public sector borrowing, which can lead to instability that effects NGDP – so it nets to zero, but if an imbalance is reached then you may have a problem. We had one such imbalance just before the great recession where the trade deficit of about 6% of GDP was being mostly offset by private sector borrowing as the budget deficit was only about 1% of GDP.

    I do appreciate the replies.

  31. Gravatar of TravisV TravisV
    14. October 2014 at 09:08

    “Inflation Expectations Keeping Tumbling”

  32. Gravatar of TravisV TravisV
    14. October 2014 at 10:59

    Great stuff from Matt Yglesias!

  33. Gravatar of ssumner ssumner
    15. October 2014 at 18:36

    Matt, I doubt the deficit is a problem, but even if it were it would have no bearing on the 11% NGDP growth in the 1971-81 period.

    Australia always runs big deficits, and has the best performing economy of any developed country.

    Thanks Travis.

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