Perceived FOMC: The making of hawks, doves and swingers☆
Introduction
An important question in monetary economics is understanding how the Federal Reserve makes its monetary policy decisions. These decisions arise from the deliberation and vote of a committee, the Federal Open Market Committee (FOMC) of the Federal Reserve.1 In this context, the Fed’s policymaking involves the aggregation of diverse individual member preferences and views into a collective decision. These preferences and the Committee’s changing composition are a constant interest for academics, financial market participants, and Fed watchers. The diversity of policy preferences is traditionally summarized in labels, like hawk and dove. A hawk is a committee member who assigns a high priority to fight inflation, while a dove is more supportive of output growth and employment. Dividing central bankers into inflation-fighting hawks or growth-promoting doves can be too simplistic. We agree. Yet, market participants, academics, and central bankers themselves use them as a convenient shorthand to summarize and communicate complex information on central bank governance and policymaking.
What molds the central banker’s type as a hawk or a dove? And, does the composition of a committee in terms of hawks and doves matter for monetary policy decisions? We investigate these two questions in this paper, focusing on the FOMC. Our findings highlight the time when FOMC members are born and schools where they received their Ph.D., as deep determinants of their type. Importantly, we document that the hawk and dove FOMC’s composition, as well as their deep determinants, help explain Federal Funds Rate deviations from the path described by a conventional forward-looking Taylor rule. Moreover, we show that the FOMC composition accounts for the variation in the importance assigned to forecasts of inflation and output in the FFR decision. Overall, our findings suggest that who is the decision maker matters for monetary policy.
The contribution of this paper relies on two original elements: i) the source of heterogeneity among FOMC members as hawks and doves, and ii) the importance of this heterogeneity for monetary policy decisions of the FOMC. Crucial to this investigation is the use of a novel measure characterizing the FOMC members as hawks and doves, by Istrefi (2019), covering more than 90% of the 130 FOMC members who have served in the FOMC since the early 1960s.2 In the first step, the cross-sectional dimension of this measure will be crucial to uncovering the deep determinants behind hawk and dove preferences. In a second step, its time-series dimension will allow us to study the evolution of the FOMC composition in terms of hawks and doves and its importance for the Federal Reserve’s monetary policy. As policy preferences are unobserved, Istrefi (2019)’s classification relies on narratives in U.S. newspapers, portraying the policy leanings of each FOMC member with respect to the dual mandate of the Federal Reserve: maximum employment and stable prices. For instance, in this classification, Paul Volcker is categorized as a hawk, Alan Greenspan as a swinger (referring to those members that switched camps over their tenure), and Ben Bernanke and Janet Yellen as doves.
We investigate the sources of heterogeneity among hawks, doves, and swingers at the FOMC, using insights from the literature on political science and social psychology. The latter suggests that people form their core economic and political beliefs during the early stages of life, and keep them mainly unaltered thereafter. In this context, we use the historical-economic background when FOMC members grew up and the ideas or “theories” in fashion at places where they studied, as a source for some clues on the formation of types. In addition, as FOMC members are appointed to their positions, we explore the match of hawks and doves with the political and/or institutional philosophies of those who appointed them. As our main focus is on the life experience before joining the FOMC and particularly, in the formative early years of the life of these members we abstracted from other factors that happened later in the life of FOMC members, such as their career background.
There are no clear-cut answers as to what makes a hawk, a dove, or a swinger. However, some tendencies are clear. We find that the odds of being a hawk are higher when a member graduates from a university linked to the Chicago school of economics (“freshwater”). In contrast, a dove has most likely graduated from a university with strong Keynesian beliefs (“saltwater”). In addition, a dove is most likely born during a period of high unemployment, like the Great Depression, and was appointed by a Democratic president. Swingers share several background characteristics of the doves. The major swings in the FOMC correspond with: i) the Great Inflation of the 1970s, ii) the discussion on price stability and inflation targets in the early 1990s, and iii) a new understanding of the economy (i.e following Alan Greenspan’s revelation on productivity and inflation in the late 1990s).
Importantly, the FOMC’s hawk and dove majorities matter for policy decisions. For the period 1987–2007, we find that a more hawkish FOMC is associated with a tighter policy, other things equal. A more dovish FOMC raises the likelihood that the FOMC will ease, other things equal. Strikingly, we find that the FFR is lowered by 80 basis points when shifting to a strong dovish majority. In addition, the response of the FFR to forecasted inflation is significantly lower when accounting for this supermajority. By contrast, a hawkish supermajority assigns a lower weight to the forecasted output gap. We also find that some of these supermajorities tend to happen in the first meeting of the FOMC with a new composition of voting members. This reflects the mechanical annual rotation of voting rights of four out of 11 FRB presidents (with the Federal Reserve of New York being a permanent voter). Our results suggest that changes in the FOMC composition, especially due to the rotation of the voting rights, can be a source of exogenous variation for Fed’s monetary policy.3 These results are robust to different specifications of the Taylor rule (assuming interest rate smoothing, among others), accounting for Fed Chair power and when considering sample periods from the early 1970s.
Interestingly, a Taylor rule that accounts for the FOMC composition in terms of “freshwater” versus “saltwater” Ph.D. graduates, suggests that the FOMC will hike the FFR when this difference increases. In terms of birth cohorts, the FOMC will ease policy with a higher number of members born during the Great Depression relative to those born after it. Accordingly, the odds of dissenting for a tighter policy are higher for “freshwater” Ph.D. graduates and that FOMC members born during the Great Depression have dissented more for easier policy than other cohorts.
Overall, our study highlights the importance of the FOMC composition for the FFR decision and it provides a rationale for the time variation in Taylor rule reaction coefficients. In addition, it suggests that ideas, through education especially, are persistent and have played an important role in the Fed’s monetary policy. Our results echo the argument in DeLong (1997) and the comment of John Taylor in DeLong (1997) on the role of memories of the Great Depression and the role of the economic theories prevalent at the time, as the “truest” cause of the Great Inflation.
Our results contribute primarily to two strands of the literature, i) the studies on central bankers’ policy preferences and their determinants, focusing on the Federal Reserve (see Belden, 1989, Chappell, McGregor, Vermilyea, 2005, Havrilesky, Gildea, 1989, Malmendier, Nagel, Yan, 2020) and ii) the studies on decision-making in committees (see Blinder, 2004, Reis, 2013, Riboni, Ruge-Murcia, 2010, Sibert, 2006). We contribute by taking a stance on the formation of central bankers (with a focus on the Fed) and by bringing novel results on the importance of ideology by education (i.e., “freshwater” versus “saltwater” school) for shaping central bankers’ preferences and policy outcomes. In particular, we examine what shapes an individual central banker as a hawk or dove. In contrast, previous studies focus on explaining mainly dissents (and more recently also the tone of speeches and FOMC forecasts). This distinction matters because, as discussed in the literature, dissents provide limited and often ambiguous information on central bankers’ preferences.4 As a result, dissents are very rare and any analysis focusing on them covers only a fraction of the FOMC, typically the regional Fed presidents. About 40% of FOMC members in our sample have never dissented and of those dissenting, very few have dissented regularly and consistently in the same direction. Instead, Istrefi’s measure provides a wider coverage as it assigns a unique policy preference (such as persistent hawk, persistent dove, and swinger) to 93% of the FOMC members that have served in the last 60 years, which is missing in the literature. Our results speak directly to the role of personalities in the making of monetary policy and have implications for the political economy of the choice of and confirmation of the FOMC members.5
Concerning the formation of hawks and doves, we take insights from the literature in political science and social psychology that highlight early-life experiences and ideas as shaping one’s personality (see Elder, 1998, Giuliano, Spilimbergo, 2014, Rodrik, 2014). We contribute to this literature by tying the policy beliefs of central bankers to these experiences, highlighting the importance of the transmission of knowledge and experience from parents and teachers.
Our paper relates to Malmendier et al. (2020) as we share the goal of understanding why central bankers may differ with regard to their economic beliefs and how that may influence policymaking. While similar in aim, the tools and the approaches we use are different. Importantly, we investigate the formation of the central bankers as persistent hawks, persistent doves, and swingers, and their effect on policy, using Istrefi’s measure. There are no hawks and doves in Malmendier et al. (2020). Instead, they analyze the FOMC forecasts, dissents, and the tone of speeches. Istrefi (2019) shows that the Hawk and Dove measure captures well tendencies revealed by preferred interest rates, dissents and forecasts. In this regard, our analysis provides a straightforward and aggregated approach, with results speaking directly to the role of personalities, and the role of powers within the FOMC for policy making.
Another important difference relates to the factors that shape central bankers. Our focus is on the events that occur during the formative years of FOMC members (from birth to the mid-20s). Notably, we highlight the role of education, through schools of economic thought (“freshwater” vs. “saltwater”), as a significant factor shaping central bankers as hawks and doves, as well as policy outcomes. By contrast, Malmendier et al. (2020) highlight the role of inflation experiences, with a higher weight assigned to the recent data than to the past. Interestingly, the unemployment experience in Malmendier et al. (2020) is insignificant. Conversely, we document a dovish bias (and a lower FFR in the Taylor rule) for the cohort born during the Great Depression, suggesting a persistent effect of this event with very high unemployment as shaping central bankers and their policy decisions. We also find that a high unemployment rate experience before entering the FOMC lowers the odds of being a hawk. Finally, in the sensitivity analysis, we show that our results hold when accounting for the measure of inflation experience as measured by Malmendier et al. (2020). Thus, our findings on the long-lasting effects of life experience for central bankers could be seen as complements.
The paper is organized as follows: Section 2 describes our FOMC’s hawk and dove measure. Section 3 discusses the sources of heterogeneity between types. Section 4 presents empirical results of the impact of the FOMC’s Hawk and Dove composition and its deep determinants for the Fed’s policy. Section 5 concludes.
Section snippets
Who are the hawks, doves and swingers?
In this paper, we use the classification of FOMC members as hawks, doves, and swingers as established in Istrefi (2019) (hereafter Istrefi’s HD). This classification is based on U.S. newspapers’ records of all relevant information that relates to the policy preferences of 130 FOMC members who served between 1960 to 2015 (hence, the perceived FOMC). This period comprises the FOMC under seven Fed Chairpersons, from William McChesney Martin to Janet Yellen. The narrative record in the media is
What factors could mold the members’ type?
We start by investigating two main factors that may have molded our FOMC members in the early years of their lives: ideology by education and major economic events. We base this investigation on insights from the literature on political science and social psychology, suggesting that people form their core economic and political beliefs during the early stages of life, and keep them mainly unaltered thereafter. In the next step, we look at the ideology (political and institutional philosophies)
Hawks and doves and monetary policy
Does the composition of the FOMC in terms of hawks and doves affect the setting of monetary policy? How do the deep determinants of hawks and doves influence their voting on monetary policy decisions? Does the FOMC member’s education/ideology affect (on average) their support for raising /lowering/ or keeping the policy rate constant? In this section, we use econometric methods to answer these questions. As is traditional in the literature, we employ an interest rate reaction function that
Concluding remarks
In this paper, we highlight two important factors in molding the policy preferences of FOMC members who have served in the past 60 years: ideology by education, and events that shaped their early lives before joining the FOMC. Obviously, there are other factors that we have not discussed. We find that having studied at a “freshwater” rather than a “saltwater” university seems to give cleaner answers to explaining differences in preferences among these members. These factors seem to matter not
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We thank Jonathan Rose for his discussion and Alan Blinder, Yuri Gorodnichenko, Amy Nakamura, Rob Roy McGregor, David Papell, Barbara Rossi and participants at ASSA 2020, at the Shadow Open Market Committee (SOMC) 2018 Fall Meeting, at the SOMC 2019 Conference, at the seminar at the University of California, Berkeley, at the Federal Reserve of Atlanta, at the Federal Reserve of Chicago, at the Bank of England, University of Houston and UNC Charlotte for comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Banque de France nor the Eurosystem.