Friday, March 1, 2013

Is Ben Bernanke an Inflation Dove?

This week Tennessee Senator Bob Corker (R) called Federal Reserve Chairman Ben Bernanke “the biggest dove since World War II.”  He means to say that Bernanke has not done enough to prevent inflation.  This sets up an interesting question: How do Fed Chairmen stack up next to one another on key variables such as unemployment and price stability?

Figure One is a key component of my survey, but I'll break it down by tenure.  The figures were taken as percent change from previous month and annualized from those figures for each term.  It will go from the Fed Chairman with the lowest average inflation to the highest.
Figure 1

Federal Reserve Performance by Chairmen:

Eugene Meyer (1930-1933)

(photo: Harris & Ewing)
Eugene Meyer presided over the worst parts of the Depression, including the failure of many banks including the Bank of United States.  His average annualized inflation rate is -9.8% and his average annualized change in GDP is a staggering -19.7%.


Roy Young (1927-1930)

Roy Young presided during the Stock Market crash of 1929.  He had an average inflation rate of -1.6%.


Daniel Crissinger (1923-1927)

(photo: Harris & Ewing)
Crissinger's era is also considered to be the Benjamin Strong era, because Strong was Governor of the Bank of New York and exerted significant influence on Federal Open Market Committee meetings.  Crissinger's average inflation rate was 0.6%.


William Martin (1951-1970)

(photo: Federal Reserve)
William McChesney Martin is perhaps the ideal central banker.  He practiced under the gold standard and the Bretton-Woods system.  He did not write books on monetary policy, but he did unorthodox maneuvers such as the original Operation Twist.  He spoke against inflation constantly, but promoted removing elements of the gold standard during his tenure.  The practice of regional Fed Governors sharing their information days before Federal Open Market Committee meetings originated with him and led to many unanimous votes.

"Any presumed benefits that flow from inflation are based on self-deception.  We will certainly grow faster and stronger if we do not pretend that we can enrich ourselves depreciating our currency.  Stable prices and a sound currency that both we and the rest of the world can rely upon is the only seal that is morally and economically defensible."

His average inflation rate was 2%; his average change in GDP was 6.6% and his average change in unemployment was -0.1%.


Benjamin Bernanke (2006-present)

(photo: Gerald Ford School of Public Policy)
Bernanke has overseen a major financial crisis and the Great Recession, and is still attempting to return the unemployment rate to its natural rate (between 5-6%).  His average inflation rate is currently 2.2%; his average change in GDP is currently 3.2% and his current average change in unemployment is 0.4%.


Thomas McCabe (1948-1951)

McCabe negotiated the 1951 Accord which re-established Federal Reserve independence.  During the war, Marriner Eccles agreed that interest rates would be kept accommodatingly low irregardless of price stability factors because funding the nation during the war was a national priority.  The 1951 Accord ended this accommodation.  His average inflation rate was 2.7% and his average change in GDP was 6.5%.


Alan Greenspan (1987-2006)

(photo: Financial Times)
Greenspan's tenure started rocky in October 1987 when the Dow Jones Industrial Average dropped 22.6% in one day.  The rest of his term have been called the great moderation because it was known as a long period of only slight recessions and generally modest growth.  His average inflation rate was 3%; his average change in GDP was 5.6% and his average change in unemployment was -0.1%.


Charles Sumner Hamlin (1914-1916)

(photo: Harris & Newman)

The first head of the Federal Reserve.  His average inflation rate was 3.9%.


Marriner Eccles (1934-1948)

The Federal Reserve board building in Washington D.C. is named after Eccles.  He is another looming Fed figure along with New York Fed Governor Benjamin Strong.  He presided over the 1937 recession within the Great Depression and Fed operations during World War II.  He acquiesced to President Roosevelt by making monetary policy accommodating during World War II and the post-war period resulting in the nation's most significant inflation event (see figure 1).  His average inflation rate was 4.3% and his average change in GDP was 11%.


Eugene Black (1933-1934)

Black was one of the first Fed heads to use activist monetary methods.  He was promoted from Governor of the Federal Reserve Bank of Atlanta to being Chairman of the Board of Governors after his easy lending policies in the early 1930's showed that significantly fewer banks in the Atlanta region failed.  His average inflation rate was 5% and his average change in GDP was 6.6%.


Paul Volcker (1979-1987)

(photo: Harvard Ethics)
Paul Volcker is known as the ultimate inflation hawk.  So why is he so far down this list?  Volcker's place on this list also shows a major defect in the methodology of this list.  Each Chairman's average begins with their first month as Chairman, but because the methods and channels of monetary transmission are muted at best, their impact is only felt months later.  It would be impossible to make a uniform number of months after because the methods of Fed communication have varied significantly over the century.

Volcker entered as chairman when inflation was significantly high, and he raised interest rates into double digits to control it.  Unfortunately he also caused a significant recession by these actions, but it did kill the major inflation of the 1970's.  His average inflation rate was 5.6%; his average change in GDP was 8% and his average change in the unemployment rate was 0.1%.


Arthur Burns (1970-1978)

Arthur Burns was one of the foremost monetary theorists of the 20th Century, but his reputation was harmed by his tenure at the Federal Reserve and the inflation that started and continued during his tenure.  The prolonged period of inflation was accompanied by recessions creating a condition of "stagflation" which combined economic stagnation and inflation.  The "Nixon shock" took place during his term when Nixon abruptly ended the gold standard by issuing an executive order.  He was the first academic economist to head the Federal Reserve.  He taught future Nobel laureate Milton Friedman at Rutgers University and was heavily influential within the monetarist school of economic thought.  His average inflation rate was 6.3%; his average change in GDP was 9.5% and his average change in the unemployment rate was 0.5%, the highest of the survey.


William Harding (1916-1922)

(photo: Federal Reserve)

Harding's tenure included the end of World War I, a significant recession, and a notably quick recovery from that recession.  His average inflation was 7.2%.


G. William Miller (1978-1979)

Miller is notable for being the only Fed Chairman that also served as Secretary of the Treasury Department.  His average inflation rate was 10.7%, the highest of the survey.  His average change in GDP was 12.3%, the highest of the survey, and his average change in unemployment was -0.7%, the biggest drop in the survey.

So was Senator Corker being crazy when he called Federal Reserve a dove on inflation?  No, the Federal Reserve has taken unprecedented steps to provide the market accommodation in response to deflationary forces (see Figure 2).  He is being ignorant of Bernanke's results and the results of his predecessors.  As I've said time and time again, the challenge for Bernanke (as with any central banker in a recession) is two-fold: both to be accommodating enough, but then perhaps more difficultly to pull back appropriately.  Bernanke's moment to pull back has not happened yet, but it will likely be a challenge as well because so much of the Fed's asset purchases have been somewhat less than liquid.

Figure 2

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