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Yellen, the Hawk?

October 21, 2013 in Economics

By Steve H. Hanke

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Steve H. Hanke

Well, it’s official. President Obama has picked Janet Yellen as his nominee to be the next Federal Reserve Chairman. In the months leading up to this announcement, the press unanimously dubbed Yellen the Queen of the Doves, pointing to her reluctance to roll back the Fed’s Quantitative Easing program. As it turns out, however, Yellen is hardly the dove she is made out to be. Indeed, when it comes to money supply, Dr. Yellen seems, well, downright hawkish.

Traditionally, the dove label has referred to an emphasis on the Fed’s mandate to pursue full employment (even at the expense of slightly higher inflation), while the hawk label has referred to a focus on the Fed’s price stability mandate. In practice, however, the dove-hawk distinction typically comes down to a question of the money supply: to increase, or not to increase?

The United States, with Yellen’s blessing, has employed a loose state money/tight bank money monetary policy mix.”

First, we must define what measure of the money supply we are talking about. While it is true that the Fed has turned on the money pumps in the wake of the 2008 crisis, the Fed only directly controls what is known as state money, also known as the monetary base, which includes currency in circulation and bank reserves with the Fed. The vast majority of the money supply, properly measured, using a broad metric, is what is known as bank money. This is money produced by the private banking sector via deposit creation, and it includes liquid, money-like assets such as demand deposit and savings deposits.

The Fed has indeed been quite loose when it comes to state money, with the state money proportion of the total money supply increasing from 5% of the total before the crisis, to 20%today (see the accompanying chart).

Given Yellen’s support for continuing the Fed’s interest rate and easing policies, it would appear that, when it comes to state money, Yellen is indeed a dove. But, where does Yellen stand on the other 80% of the money supply? To answer this question, we must look not to her stance on monetary policy, per se, but rather on financial regulation.

For some time, I have warned that higher bank capital requirements, when imposed in the middle of an economics lump, are wrong-headed because they put a squeeze on the money supply and stifle economic growth. …read more

Source: OP-EDS

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