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Econ Focus

Third Quarter 2014

Federal Reserve
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Richmond's Hawkish Tradition

In the Fed's flock, Richmond Fed President Jeffrey Lacker is often counted among the hawks by outside observers. While he joked in 2013 that he wouldn’t mind being a different bird, such as one of the great blue herons he sees flying outside his office window, it's not hard to see why the hawk label has stuck. In 2012, he dissented at every FOMC meeting against the Fed's accommodative actions. In those dissents, he expressed concern that the Fed might fall behind on its price stability mandate and also voiced opposition to the purchase of instruments like mortgage-backed securities, which he argues constitutes fiscal rather than monetary policy since it directs credit to specific sectors of the economy. Ultimately, he argued, that could jeopardize the Fed's monetary policy independence and thus its ability to keep inflation low — a hawkish argument indeed.

Lacker is certainly not the first Richmond Fed president to object to the Fed’s conduct of monetary policy. He currently ranks third in dissents by bank presidents, immediately followed by Robert Black at number four. Black was the first Ph.D. economist to serve as Richmond Fed president, starting in 1973. That decade was marked by vigorous debate among monetary policymakers about the cause of mounting inflation. Black drew from his own understanding of economics as well as the work of Richmond's growing staff of research economists (many of whom had a monetarist background) to argue that the main cause of inflation was the growth of the money supply. It was a view that was not widely held at the time, and Black's calls for substantial monetary tightening to rein in double-digit inflation put him at odds with members of the FOMC who favored a lighter touch. His stance was given credence by the disinflation that occurred through monetary tightening under Chairman Paul Volcker, and today the idea that inflation is largely a monetary phenomenon is part of the Fed's statement of principles.

Richmond's focus on price stability continued under Black’s successor. Alfred Broaddus became president in 1993, having served as a key economic adviser to Black. Although inflation had fallen substantially by that time, Broaddus was concerned that the Fed might become complacent and lose the credibility on inflation that it had fought so hard to obtain. He maintained Richmond’s hawkish tradition and was a vocal proponent of a singular inflation target, or at the very least a numeric inflation goal, as a way to anchor the public’s expectations that the Fed would keep inflation low. While the Fed has not adopted the former, it did announce a long-run inflation goal of 2 percent in 2012.

In a 2012 interview, Lacker noted that the record left by Black and Broaddus was "a real inspiration" for him. Through speeches and dissents, he has often returned to the theme of price stability and the "hawkishness" with which the Richmond Fed has come to be associated. Indeed, Lacker recalled that when he dissented for the first time in 2006, then-Chairman Alan Greenspan told him: "I would've been disappointed if you hadn't."

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David A. Price (804) 697-8018