Doves — those who, to some degree, prioritize unemployment concerns over inflation concerns — have ruled the roost at the U.S. Federal Reserve for the past several years. This is important to note because the kind of unconventional monetary policy tactics employed by the Fed over the past half decade could probably have only been developed and deployed as part of a dovish strategy. For example, if it were inflation and not jobs at the top of the agenda, quantitative easing may not have been so large an operation, and the target federal funds rate may not still be trapped at the zero bound. More importantly, the current conversation about the future of monetary policy would look a lot different.
The dovish dynasty arguably began with Alan Greenspan, who was appointed Fed Chair in 1987 by President Ronald Reagan. Although Greenspan took office at a time when inflation was well under control, he was no stranger to the enormous damage that runaway inflation could cause. Greenspan’s predecessor, Paul Volcker, had spent nearly his entire tenure fighting tooth and nail to maintain price stability, and, although Volcker retired victorious, it was not a fight that any Fed chair would want to relive.
Greenspan’s position on inflation is well captured in a 1996 debate about the future of the Fed’s long-term strategy — that is, a debate, among other things, about whether the Fed should maintain a primarily dovish or hawkish posture. Greenspan, who was then chairman, argued that the central bank should try to eliminate price inflation all together, suggesting a zero percent inflation target. Janet Yellen, who was then serving on the board of governors, countered that 2 percent is a healthier expectation. At the time, inflation was running at about 2.3 percent, and many economists feared it was heading higher.
But inflation didn’t get out of control. Shortly after that debate, the dot-com crisis knocked the economy off its feet and inflation decelerated. Jobs quickly became the Fed’s main concern as the unemployment rate climbed to above 6 percent in 2003. In response, Greenspan drove the federal funds rate as low as 1 percent, a time-honored tactic aimed at stimulating economic growth. It was this response that really marks the beginning of the dovish dynasty at the Fed.