Ben Bernanke Is Actually A Hawk

If you look up "hawk" in the dictionary, you might find a picture of this guy, Paul Volcker.

Paul Volcker took over the Federal Reserve in 1979.

The CPI in 1979 was growing at over 12%. Inflation was HOT.

Volcker wanted to get that rate down.

To combat the high inflation, Volcker raised interest rates dramatically.

This ultra aggressive tightening caused the economy to go into recession, and the unemployment rate went wild, hitting 11%.

But Volcker didn't care. His job was to whip inflation.

And it worked.

Inflation fell significantly from its peak.

And the unemployment spike was a temporary issue. It rapidly came down throughout the 80s.

So that's a hawk. Someone who tightens rates to beat inflation and doesn't care about unemployment.

Now today we call Bernanke a dove because he's an innovator in terms of loose monetary policy.

And we call SF Fed vice-chair Janet Yellen a dove, because she's so obsessed with unemployment, and making it clear that she's not eager to tighten rates anytime soon.

But are they really doves, just because they're doing everything they can to fight unemployment, rather than inflation?

No!

Economist Andy Harless explained in a post today that essentially what it means to be hawkish is to signal that you're a "tough macho badass" who just doesn't care.

...if you’re a tough, macho badass, people will always expect you to do the tough, macho badass thing. You’ll always be able to make credible threats, because carrying out threats is always the tough, macho badass thing to do. And since the threats are credible, you mostly won’t have occasion to carry them out.

This principle has a traditional application to monetary policy. If your central banker is a perfectly rational nerd, he’s going to let the inflation rate get too high, because he won’t be able to make a credible threat to cause a recession. People won’t expect him to carry out the threat, because in most cases it won’t be rational to carry out the threat. After all, how often is it really rational to cause a recession? On the other hand, if your central banker is a tough, macho badass, he’s not going to let the inflation rate get too high, because he will be able to make a credible threat to cause a recession.

People will expect him to carry out the threat, because causing a recession is the tough, macho badass thing to do (for a central banker). And since the threat is credible, people will keep their prices down, and he won’t have to carry it out. (OK, the economics is a little more complicated, but that’s the general idea.)

The upshot is that Paul Volcker was a hawk (a tough, macho badass) because he only cared about inflation, and didn't let anything bother him back then.

Today we have a new kind of hawk. They've signaled aggressively that they're not going to freak out about inflation, because their goal is to fight unemployment.

Rather than referring to Janet Yellen and Ben Bernanke as doves, we need to call them Unemployment Hawks.