Month: November 2013

Forecasting why Yellen is Bernanke 2.0

After Yellen’s confirmation hearing, most market analysts were surprised how future chairwoman Janet Yellen managed to use the same contingent-dovish language as predecessor chairman Bernanke.

Jeffersons’ umbrella Fund US Economist mentioned in a note to clients (taken from BBC):

“As expected, Janet Yellen has been a defender of an accommodative monetary policy, and sounded remarkably like Ben Bernanke on key current issues,”

Zero Hedge blog tweeted:

6 out of 5 Wall Street economists agree: Yellen is Bernanke 2.0

In a research paper I wrote while at The University of Chicago, I forecasted the ideologies of all FED members that have seated at the FOMC since 1936 until 2013 (October). The results pretty much are in line with market analysts now take as a fact: Yellen is Bernanke 2.0
The results also cast how an average Democrat appointive FED is more dovish than a Republican, how Volcker is an inflation Hawk compared to almost all FED governors and how both Yellen and Bernanke are doves.
Other market analysts have made bets about who is a hawk and who is at the current FED. Thomson Reuters’ “monetary ideology” forecasts cast relatively similar to my results, with a correlation of 0.4 once rescaling. The difference arises in how one method is subjective and based on intuition, while the other is objective and is based on policy decisions and votes. For example, Reuters’ does not account Kansas City FED Esther George as hawk (while I do), despite that she has been consistingly voting against maintaining QE3.
The results also cast past ideologies of the mean board, showing how the current board is as dove as it gets. The mean monetary ideology of the current FED is the most dovish that has ever seated since 1936. Here they correlate with output gap and CPI inflation.
p2 p3

During Eccles’s chairmanship an ideological recomposition was observed inside the period FOMC , where in 1936-1940 the average board was relatively hawkish, with inflation below 2% and an economy just coming out of the 1930 crisis . This seemingly contractionary position is in line with Friedman (1963), who explained the Great Recession from the monetary point of view with a Fed that limited broad base money without supporting the needs of the product. Later in the period 1945-1950 there’s a recomposition supporting the product , tolerating higher inflation levels and achieving a positive GDP gap in 1950.

Subsequently, Governor Martin 1950-1970 period was characterized initially by a less expansive ideological position, managing to keep inflation under control and taking the positive output gap to neutral levels. The change in the ideological position coincides with candidate R. Nixon complain, who argued that the Republican Party lost the presidential election in part by the position contractionary FOMC members under Governor Martin.

In the second part of the mandate of Governor Martin 1963-1970, we note the change in the ideological position with the arrival of new members to the FOMC. Thus, in this period the average ideological position is more expansive than that of 1957-1963 , which is related to an increase in inflation and output gap positive historically . The ideological shift coincides with the arrival to the presidency of Democrat Lyndon Johnson .

The mandate of Governor Burns seems to recover a contractionary ideological composition , partially moderating the inflationary pace and reducing the output gap. The mandate of Miller , although brief , is not clearly related to the high increase in inflation. Ideological estimates fail to predict the inflationary shock after Volcker was elected FED Governor.

The mandate of the Governor Volcker , mainly in its second stage of 1985-1989 , suggests a contractionary ideological position that is related with a reduction in inflation under the sacrifice of a negative output gap . Greenspan ‘s mandate is neutral on average , with a very slightly expansionary ideology that averages -0.04 between 1989-2005 which is affected by the position yet expansive under the Clinton administration and the appointment of Governors elected by the then President. The relatively neutral position is related with inflation very close to the target of 2 % during the term , and initially negative output gap that achieves located on neutral ground in 1997 and remains close to that level , with some cyclical variations .

2005-2013 Bernanke administration has introduced some changes in its composition , but maintaining as the most ideologically expansive in the history of the Fed. This goes in line the post- crisis period where the FOMC has kept its benchmark rate at expansive levels (0.25%) with an unprecedented easing ( QE1 through QE3 ) a largely negative output gap and inflation recently below the goal of 2 %. Ideological estimates find that a contractionary FOMC board as that seen in 1937 or Martin’s FED, would not have supported output with equal forcefulness. It was only with a board ideologically as expansive as the current that output has managed to received an extensive monetary support.

Regarding polarization, it seems that unlike Congress, polarization keeps outside the FED. Despite the average democrat is a dove compared to the average republican, their views change along with the cycle, and seem independent from growing congressional polarization and income inequality.
A summary of the document will be published next month at ANIF’s Carta Financiera.