President Obama has appointed three new doves to the Federal Reserve Board, thereby taking command of the nation’s central bank. But there’s a split developing inside the Federal Reserve System: The Reserve Bank presidents, appointed by their own district boards of directors, are increasingly likely to wage a battle royale against the central-bank headquarters in Washington and its free-money, ultra-easy policies.
The new Obama appointees include Janet Yellen, president of the San Francisco Fed, Peter Diamond of MIT, and Sarah Bloom Raskin, the top Maryland state banking supervisor who blames Wall Street greed for much of the financial crisis.
Now, Ms. Yellen is a highly credentialed and respected former Clinton economist. But the new Fed vice chair is also a devotee of targeting the unemployment rate as a key monetary-policy gauge. The Keynesian idea here is that too many people working cause inflation. So with a 9.7 percent unemployment rate, she can be expected to back Fed head Ben Bernanke in his quest for continued free money, with the other new doves following suit.
Make no mistake about it. These appointees (along with Daniel Tarullo, an earlier Obama appointee and another dove) make for an easy-money, pro-regulation Fed. As for monetary soundness, price stability, and a reliable King Dollar, these highly credentialed academics won’t pilot us there.
California economist Scott Grannis recently blogged about “easy Fed, strong gold.” The yellow metal, which has proven to be the best indicator of currency confidence, continues its upward trend against the dollar, and for that matter against the euro and Japanese yen. Grannis also has been writing about the surge in commodity prices, which are marching onward and upward in a V-shaped recovery. Grannis, in other words, is tracking the appropriate indicators.
Many supply-siders, including myself, believe that commodity prices in the open market are the best measures of whether money is too tight or too loose. But no one on this new Obama monetary team will be paying much attention to gold and commodities. They believe in the so-called Phillips Curve tradeoff between inflation and unemployment, despite the breakdown of that model back in the 1970s, when both measures rose together, and for most of the 1980s and 1990s, when both measures fell together.