David Leonhardt on Fed Policy. Also, Is Fed Policy Influenced by the AFL-CIO? Yes.

This: As Economy Sputters, a Timid Fed.

It’s clear which way the Fed has erred recently. It has done too little. It stopped trying to bring down long-term interest rates early last year under the wishful assumption that a recovery had taken hold, only to be forced to reverse course by the end of year…

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group — at least not one as influential — that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The result is a bias that can distort the Fed’s decision-making. Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany.

How can we put pressure to get unemployment-obsessed Fed governors appointed? Kevin Drum made this observation:

Hmmm. A big, powerful, influential group that obsesses over unemployment. Sounds like a great idea. But I wonder what kind of group that could possibly be? Some kind of organization of workers, I suppose. Too bad there’s nothing like that around.

I wrote before about how, if you dig into the FOMC transcripts from the 1980s to the late 1990s, the Federal Reserve sits around worried about the strength of unions and that wages are rising too fast. The August 1997, when the Fed gets really pissed about the UPS strikes, is particularly interesting.  As Mr. Syron said in 1990: “That’s right, but we are not in an AFL-CIO meeting. And they have a little different view than we do on what is considered wage inflation.”  They also might have a little different view on unemployment.

Someone tried to quantify this very question in a research paper I’ve been meaning to mention. Is the Federal Reserve influenced by the Chamber of Commerce?  The AFL-CIO? Or is it independent. The debate on whether or not the Federal Reserve is “independent” of non-financial industrial interests was turned into an empirical question by Charles L. Weise in his paper: Private Sector Influences on Monetary Policy. Abstract:

Using Lexis-Nexis, I collected statements on monetary policy reported by the Associated Press from 1978 to 2001 from three organizations representing non-financial economic interests: the AFL-CIO, National Association of Manufacturers (NAM), and the U.S. Chamber of Commerce (COC). These groups were chosen because of their public prominence, broad membership, and frequent public statements concerning monetary policy…Among the hundreds of statements concerning monetary policy made by the three groups, I selected only those that included an explicit policy recommendation or those that, considering the context, were clearly normative….[bunch of statistics]

[CONCLUSION] There is no evidence that the Fed responds in a systematic way to policy recommendations of the banking industry via the Federal Advisory Council once variables that help forecast inflation and output are controlled for. Similarly, the Federal Reserve does not appear to respond to signals from non-financial pressure groups or public opinion.

Sounds great, right? Here’s something he buries pre-conclusion (my bold):

The results in Table 4 reinforce the finding in Table 3 that the Fed ignores signals from nonfinancial pressure groups. In fact, one could interpret the positive and statistically significant coefficient on the AFL-CIO signalling variable as an indication that the Fed purposely takes a position opposite to that advocated by the AFL-CIO.

Awkward! Here’s a Fed Policy Rule: Do the opposite of what the AFL-CIO wants. Good to see labor unions (negatively correlated) influencing Federal Reserve policy. The author continues to investigate and finds that this isn’t significant post-1985: “When the same regression is run for the period 1985:01-1998:09, the coefficient becomes statistically insignificant,” saying that it is mostly fighting with the Volcker Fed. Good times.

My question still stands: What Would a Strong Liberal Federal Reserve Member Look Like?

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