“I am not happy about it”, said President Trump about the Federal Reserve’s interest rate increases, in a recent interview with CNBC. President Trump’s unhappiness with the Federal Reserve’s policy brought to our attention once again the issue of political pressure and central bank independence. While the verbal unease of the president in recent years is not enough to shape Federal Reserve policy, presidents have another channel to influence monetary policy, namely, through the appointment process of seven of the 12 Federal Open Market Committee (FOMC) members who decide on monetary policy.1,2 Such influences are well known in the history of monetary policy by the Federal Reserve. For instance, in the mid to the late 1960s, President Johnson not only put direct political pressure on Fed chairman William McChesney Martin to follow easy-money policies, but also appointed Board members who could contradict Martin and support such policies. In the literature, these policies are widely blamed for originating the Great Inflation of the 1970s (Meltzer 2005). Similarly, in the mid-1980s, although President Reagan was reluctant to publicly question Chairman Paul Volcker’s tight policies, he nominated several Board members who could “slow him down” with raising rates. In 1986, four Reagan appointees (referred in the media as ‘The Gang of Four’) outvoted Volcker in a discount rate cut, leading to speculation and nervousness in financial markets that Volcker might soon resign.
Likewise, President Trump has the rare chance to appoint six of the seven Federal Reserve Board members, including the Chairman, during his first two years in office. So far, hehas nominated five of them. Two of his nominees – Chairman Jerome Powell and Randal Quarles – are already in the FOMC, while the other three – Michelle Bowman, Richard Clarida and Marvin Goodfriend –are waiting for Senate confirmation. The general feeling is that these nominations are reasonable choices.
Can President Trump shape the face of the Federal Reserve by choosing people that share his or his administration’s preferences? Who do politicians generally pick for the Federal Reserve? In a recent paper (Bordo and Istrefi 2018), we examined the policy preferences of FOMC members who served from the early 1960s to 2015 in relation to the ideology of who appointed them. We examined both Board governors relative to the party of the US presidents, and the Regional Federal Reserve Bank presidents relative to the Board of Directors of the regional Federal Reserve Bank that appointed them. We investigated three types of policymakers: inflation-fighting hawks, growth-promoting doves, and swingers (i.e. those members perceived as swinging between the hawkish and dovish camps at the FOMC). The hawk and dove measure is compiled by one us (Istrefi 2017) based on narrative records in US newspapers regarding the policy leanings of FOMC members with respect to the Federal Reserve's dual mandate. It is compiled for 130 FOMC members who served from the early 1960s to 2015.3 As Figure 1 shows, the hawk and dove composition of the FOMC has varied considerably over time. This variation is due to the annual rotation scheme of the FOMC, to the turnover of members, and to swings in preferences.
Figure 1 Hawks and Doves at the FOMC (% of the share of voting FOMC members)
Notes: The share of perceived hawks and doves for each FOMC, from 1963 to 2015. Perceived preferences are followed in “real time”, where the assigned preference of FOMC members in a meeting m, year t is based on perceptions before meeting m. In the chart, the share does not always add up to 100, as it can be that the policy preference of one or more members is not known yet.
Source: Istrefi (2017).
Ideology by appointment
The ‘Partisan theory’ of monetary policy first formulated by Hibbs (1977) and supported empirically by Beck (1982), Stein (1985) and Alesina and Sachs (1988), among others, suggests that Democratic administrations prefer ‘easy’ monetary policies and choose doves, whereas Republican administrations prefer tightness and choose hawks. Indeed, our analysis shows that Democratic Board nominees have been mostly perceived to be doves during their tenure in the FOMC and very few have been perceived as hawks (Figure 2). The share of hawks does appear higher for Republican nominees, but a slightly higher share of them are also perceived to be doves. This is not very surprising. First of all, if re-election motives are present, even Republicans might choose members with dovish preferences in expectation of policies to support growth and employment. Second, the US president appoints the Board members, but each of them has to be confirmed by the Senate. Nominees have higher chances of confirmation if they are ‘likable’ by both sides in the Senate. Our data show that 70% of the Board Governors in our sample were confirmed in a Democratic-majority Senate.
Figure 2 Political or institutional philosophies get checked at the door?
Note: The panel on the right abstracts from the regional Fed presidents for which the policy preference remained unknown.
Source: Bordo and Istrefi (2018).
In contrast, when looking at regional Federal Reserve Bank presidents who are appointed by their bank’s board of directors, we observe a high share of hawks irrespective of the president’s party (Figure 2, bottom panel). Federal Reserve Bank presidents seem to be picked rather for having beliefs that go in line with those of the regional Federal Reserve Bank that they represent. This seems especially true for Federal Reserve Banks that have a long tradition of institutional ideology (for example, the Federal Reserve Bank of Cleveland’s ‘outspoken, inflation‐fighting roots’). Several regional Feds, like the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Dallas, the Federal Reserve Bank of New York or the Federal Reserve Bank of St. Louis, have had presidents predominantly perceived as hawks (Figure 3). The Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Kansas City had presidents predominantly perceived as swingers, whereas the Federal Reserve Bank of Philadelphia and the Federal Reserve Bank of San Francisco had presidents predominantly perceived as doves. Beyond institutional memory and ideology, several other factors could explain this distribution of types, such as the ties of the Federal Reserve Banks with the Board of Governors (which is believed to have become more influential over time in choosing Federal Reserve Bank presidents), how strong the ties of the Federal Reserve Banks with the commercial banks of the region are, or the conservative versus liberal tendencies of regions.
Figure 3 Ideology in the Federal Reserve Bank presidents
Source: Bordo and Istrefi (2018).
The divide in views of the Board versus the regional Federal Reserve Bank presidents could be especially important today when the FOMC is short of four Board members, thus making the five regional Fed Presidents the voting majority (a rare situation for the governance at the Federal Reserve). Historically, the Federal Reserve Bank presidents have always been more independent and outspoken than the members of the Board, who have been more supportive of the Chair of the Board of Governors (the Chair of the Fed). The last time a Board member dissented on policy was in 2005, in one of the last meetings of Chairman Alan Greenspan. Since then, Federal Reserve Bank presidents have dissented 57 times, the majority of them for tighter policy. Thus, Chairman Powell might face a harder job in forming a consensus with a Federal Reserve Bank Presidents-led majority. A weak Board and a weak FOMC could find it challenging to manage further rate hikes in an environment of loose fiscal policy and of uncertainty consequent upon President Trump’s trade policy. A weak FOMC means trouble ahead if conditions deteriorate and a recession looms.
What moulds the central banker’s type as a hawk or a dove?
In our paper we highlight two important factors in moulding the policy preferences of FOMC members who have served over the past 60 years: ideology by education, and events that shaped their lives before joining the FOMC. Obviously, there are other factors that we have not discussed. We find that the odds of being a hawk are higher when a member is born during a period of high inflation or graduated from a university linked to the ‘Chicago School’ of economics (‘freshwater’). A dove is most likely born during a period of high unemployment, like the Great Depression or graduated from a university with strong Keynesian beliefs (‘saltwater’). Swingers share several background characteristics of the doves, but not always.
Figure 4 Ideology by education/schools of thought
Source: Bordo and Istrefi (2018).
Authors’ note: This column draws largely from Bordo and Istrefi (2018). The views expressed here are solely of the authors and do not represent the views of the Banque de France or the Eurosystem.
Alesina, A and J Sachs (1988), “Political Parties and the Business Cycle in the United States, 1948‐1984”, Journal of Money, Credit and Banking 20(1): 63‐82.
Beck, N (1982), "Parties, Administrations and American Macroeconomic Outcomes", American Political Science Review 76(1): 83‐94.
Bordo M and K Istrefi (2018), "Perceived FOMC: The Making of Hawks, Doves and Swingers," NBER Working Paper 24650.
Chappell, H W, Th M Havrilesky and R R McGregor, (1993), “Partisan Monetary Policies: Presidential Influence Through the Power of Appointment”, The Quarterly Journal of Economics 108(1):185–218.
Istrefi, K (2017), “In Fed Watchers' Eyes: Hawks, Doves and Monetary Policy”, manuscript, Banque de France.
Meltzer, A H (2005), "Origins of the Great Inflation," Federal Reserve Bank of St. Louis Review, Part 2: 145-176.
Meltzer A H (2010), A History of the Federal Reserve, Volume 2, University of Chicago Press.
Stein, H (1985), Presidential Economics, New York: Simon and Schuster.
Stein H (1994), Presidential Economics, Third Edition, American Enterprise Institute.
Wells, W C (1994), Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970-78, Columbia University Press.
 For instance, the Nixon administration put pressure on Chairman Arthur Burns and the FOMC to loosen its monetary policy because it feared that the continuation of the 1970 recession into 1971 would threaten the following year’s election (Meltzer 2010, Stein 1994, Wells 1994).
 Results of Chappell et al. (1993), based on estimating monetary policy reaction functions for the period 1960-1987, suggest that the appointment process is the primary mechanism by which partisan differences in monetary policy arise.
 The hawk-dove measure is based on all the relevant information derived from the policymaker’s backgrounds (origins, education, political interests and supporters), their economic beliefs (expressed in writings, testimonies, speeches) and actions (votes and dissents). To build the hawk-dove measure, about 20,000 articles or reports from more than 30 newspapers and referencing 130 members were read (human reading instead of text mining algorithms) to collect quotes that are informative on the policy preference of each member. These quotes are quantified as perceptions for either a hawk or a dove. Perceptions are traced year by year, for the whole tenure of the FOMC member.