Economic Research:

"Hawk" And "Dove" Labels Are For The Birds

Credit Market Services: Paul Sheard, Chief Global Economist and Head of Global Economics and Research, New York (1) 212-438-6262; paul_sheard@standardandpoors.com

Table Of Contents
Inflation Targeting: A Decidedly Two-Sided Affair The Inflation-Unemployment Trade-Off: All Birds Of A Feather Now Quantitative Easing Or Quantitative Uneasy? A Matter Of Disposition Or Judgment? All Bird-Watching Eyes On Chairman Bernanke's Successor Related Research Endnotes

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Economic Research:

"Hawk" And "Dove" Labels Are For The Birds

(Editor's Note: The views expressed here are those of Standard & Poor's chief global economist. While these views can help to inform the ratings process, sovereign and other ratings are based on the decisions of ratings committees, exercising their analytical judgment in accordance with publicly available ratings criteria.) The recent "tapering" kerfuffle triggered by Federal Reserve Chairman Ben Bernanke's comments after the June Federal Open Market Committee (FOMC) meeting (1), and speculation about who will succeed Mr. Bernanke when his term ends and he likely steps down at the end of January next year, have elicited much "bird-watching" commentary. Why did the FOMC suddenly sound so "hawkish?" Isn't one of the front-runners to succeed Chairman Bernanke a bit too much on the "dovish" side to sail through the Senate confirmation hearings? And so on, with little insight generated. Central bank watchers use the terms "hawks" and "doves" when describing the policy predilections of individual central bankers as if their meanings were clear. They aren't--and they shouldn't. The terms obscure so much that they should be avoided, or at least used with extreme caution. Better to examine the views of central bankers, both on substantive economic and monetary issues and on the state of the economy and its outlook, than put them in misleading boxes. Overview Characterizing monetary policymakers as "hawks" and "doves," a legacy of days when high inflation was the dominant threat, has outlived its usefulness. The recent financial crisis has revealed inflation-targeting to be a two-sided affair: A policymaker who is a "deflation hawk" may be mistaken for an "inflation dove." When the economy is recovering from a deep slump and the risk to the inflation target is from below, aggressive policies to improve employment conditions are warranted and do not necessarily conflict with a vertical long-run Phillips curve. Rather than applying simplistic labels, it's better to analyze the positions of monetary policymakers in terms of their views on how monetary policy works and on the state of, and outlook for, the economy. When it comes to Chairman Ben Bernanke's successor, credibility and continuity are key. The Fed needs to remain a "technocratic" institution, quarantined from partisan politics.

The term "hawk," reflecting the notion of vigilance, is commonly used to describe a central banker who is tough on inflation. A "dove," with its connotation of placidity, is one who is more relaxed, perhaps because he or she cares a lot about employment or some other policy objective, too. To caricature, hawks are prone to see a pick up in inflation around the corner and "always" want to hike rates, whereas doves have "never" seen a rate cut they don't like and are prepared to tolerate a bit more inflation, or risk of it, in order to underwrite stronger growth. Hawks hate quantitative easing (QE); doves love it. Hawks favor a single-minded focus on inflation; doves think employment should be given considerable weight, too.

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Inflation Targeting: A Decidedly Two-Sided Affair

The biggest problem with the hawk-dove nomenclature is that it is seriously out of date. It has outlived its usefulness. Since the 1970s and up until the Great Financial Crisis, and particularly up until Japan sunk into deflation in the 1990s, the risk to price stability was seen to be virtually exclusively on the upside (too high inflation), and the job of central banks was seen to be to bringing inflation down and keeping it low. When targeting inflation was essentially a one-sided affair, it made some sense to use short-hands like "hawk" and "dove" to describe central bankers. But since Japan went into deflation and since the Great Financial Crisis and ensuring recession, many major central banks have faced serious challenges to their inflation-targeting success from below. Disinflation and the risk of deflation, and its reality in Japan, have loomed large. Most modern central banks have very similar monetary policy frameworks. They typically target about 2% consumer price inflation. That means they need to keep inflation from going up, but they also need to keep inflation from falling too far below its target and particularly into negative territory. They need tools that work in both directions so they can persuade the public that it should view the inflation target as credible; then, it is rational for the public to form its inflation expectations around that target, thus making it much easier for the central bank to achieve it. In the jargon of the profession, the central bank tries to "anchor" the public's inflation expectations. Here's the rub. A central banker who faces a risk of deflation will favor very aggressive policy action of the kind that could easily make that person seem like a dove to someone viewing things through the traditional hawk-dove lens. But the banker is really a hawk on deflation (and probably on inflation too). Federal Reserve Chairman Ben Bernanke has often been pigeon-holed (excuse the pun) as a dove, because of his famous "helicopter Ben" speech (2) and the Fed's "money printing" under his leadership since the financial crisis. But this misses the point. When the threat is deflation, a central bank fights that threat not the nonexistent (or at least far distant) threat of runaway inflation. Because central banking these days is a decidedly two-sided affair, presumably there could be four breeds of central banker: a hawk on inflation and a hawk on deflation, too; a hawk on inflation but a dove on deflation; a dove on inflation but a hawk on deflation; and a dove on both. Time to move on.

The Inflation-Unemployment Trade-Off: All Birds Of A Feather Now

The terms hawk and dove are also often used to describe differences in how central bankers view their mandates. A hawk has a single-minded focus on inflation, whereas a dove puts considerable weight on employment, too. But a prior question is whether control of inflation is given primacy--or whether it is put alongside economic growth or employment-related goals in the central bank's legislative mandate. All major central banks are tasked with controlling inflation. But inflation is a monetary phenomenon that arises from forces playing out in the real economy. So, not surprisingly, their mandates also refer to conditions in the real economy.

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Take the big four central banks. In the monetary policy arena, both the European Central Bank (ECB) and the Bank of England have a prime mandate of price stability and a secondary mandate of contributing to other government goals (3). The Bank of Japan has a prime mandate of price stability but this is specifically seen as the means of "contributing to the sound development of the national economy," and the bank is required to coordinate its monetary policy with the "basic stance of the government's economic policy" (4). The U.S. Federal Reserve is said to have a "dual mandate" of price stability and maximum employment, neither one having explicit primacy (5). But the Fed has usually seen the pursuit of price stability as being the best way to promote full employment (6). These differences in the way the central bank mandate is framed say more about commonalities than differences. At the intellectual core of modern monetary policymaking is the idea that in the long run there is no trade-off between inflation and unemployment, or that the long-run Phillips curve (which plots the relationship between the unemployment rate and the inflation rate) is vertical (7). Based on the intellectual trail-blazing of Milton Friedman and Edmund Phelps, there is a "natural" rate of unemployment (8), corresponding in effect to full employment of those who want to work; any attempt to stimulate economic and employment growth beyond that point will ultimately just lead to higher inflation at the same unemployment rate. The natural rate of unemployment--that is, conditions in the real economy, not the predilections of monetary policymakers--will condition the speed limit of the economy. Nowadays virtually all central bankers ascribe to this theory in some form or other. In the old days, hawks may have been the ones who understood the verticality of the long-run Phillips curve, or who respected its implications, and doves were policymakers who didn't understand it or didn't respect it if they did. But these days, hawks and doves are birds of a feather when it comes to this basic tenet of monetary theory. The long run is a hypothetical state in which all of forces working on the economy have played out, and it is at a resting point. As Keynes pointed out in one of his most famous passages (9), however, the economy never actually gets to the long run. Could there be an exploitable trade-off in the short run? In theory yes, but the insight of the vertical long-run Phillips curve is that such attempts will sooner or later backfire, as inflationary pressure builds, hitherto stable inflation expectations get unhinged, and higher inflation results. No modern monetary policymaker is trying to exploit a short-run (downward-sloping) Phillips curve. Take the Fed. Since its landmark September and December 2012 decisions, in particular, the Fed has been easing aggressively (via QE and forward guidance) in an attempt to speed up the rate of economic recovery, which has been painfully slow, and bring the economy back closer to full employment faster than would otherwise have been the case (10). But the Fed is not exploiting a trade-off between inflation and unemployment and therefore being "dovish" in the sense mooted above. The Fed faces a situation in which it is missing both of its targets from the wrong side, so aggressive monetary policy action is helpful to attaining both targets (11). Economic theory says that, when there is a large amount of slack in the economy (an unusually high unemployment rate being one clear indicator), inflationary pressures will be muted. In this "output gap" view of the world, a large and persistent output gap (what is being produced being much less than what could be produced) would lead to downward pressure on inflation and, if inflation fell below target, could head dangerously in the direction of deflation. The more recent management theory of inflation-targeting says that, if the central bank has credibility, it can keep

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inflation expectations well anchored, meaning there is less disinflation pressure and risk of deflation when the output gap widens. This acts to help stabilize the economy and gives the central bank more leeway to apply the kind of extraordinary stimulus the Fed and some other central banks have been applying since the crisis. Some see the Fed's current open-ended QE with forward guidance as flirting dangerously with "going soft on inflation" and risking unlearning the (vertical Phillips curve) lessons of the past. After all, hasn't the Fed said that it is willing to accept higher inflation--up to 2.5%--in the service of bringing down the unemployment rate? Isn't this putting one foot on a slippery slope? From a traditional "inflation hawk" perspective, doesn't this potentially sacrifice one part of the Fed's "dual" mandate (price stability) at the altar of the other (maximum employment)? The concern is understandable, but seems misplaced. Read the fine print. The open-ended QE aimed at improving labor-market conditions is contingent on the context remaining one of price stability. The commitment to hold the federal funds rate close to zero until the unemployment rate comes down to at least 6.5% (that is, 0.5%-1.5% above where FOMC participants see the long-term natural rate) is contingent on "longer-term inflation expectations [continuing] to be well anchored." The 0.5% leeway on inflation specified in the policy rate forward guidance is less "going soft on inflation" than recognizing that, given the variation in inflation readings, to hit a point target on average means there will be readings on either side and therefore that to impose a trigger at the level of the target itself would be tantamount to setting a trigger that is lower than the target on average. True, the Fed's "Statement on Longer-Run Goals and Monetary Policy Strategy," released in January 2012 (and amended in January this year) does recognize the possibility of there being a trade-off or conflict between the goals of stable prices and maximum employment: "In setting monetary policy, the [Federal Open Market] Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate." However, this issue is currently moot because inflation is below target and expected to be persistently so, so there is no conflict between the two parts of the Fed's mandate. Such a conflict is unlikely to arise any time soon.

Quantitative Easing Or Quantitative Uneasy?

Are hawks skeptical of QE and doves in love with it? Much of the conventional Fed-watching commentary would suggest so. QE is a surprisingly controversial policy, but the hawk-dove distinction sheds little light on the controversies. Views on QE would seem to differ more because those holding them subscribe to differing underlying models of the economy and how monetary policy (particularly QE) works, or divergent views on the likely evolution of the economy and therefore the strength of future potential inflationary forces (see next section), than because of differential tolerances toward inflation. QE shouldn't be controversial because, if society is going to give the central bank a job--control inflation--it had better give it the tools to achieve it, including a tool to ease monetary policy if it still needs to after it has exhausted its

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conventional interest-rate ammunition. QE is such a tool. Technically, it involves the central bank changing the composition of the aggregate portfolio held by the private sector, by purchasing assets financed by creating bank reserves. It is only the central bank that has this "exorbitant privilege" (12). And it is fortuitous that it does. Central bankers do hold divergent views about QE: how it works, how effective it is, and what inflationary risks it entails. Some, schooled in the (dominant but deeply misleading) money multiplier tradition, worry that, by creating a large amount of excess reserves, central banks risk sowing the seeds of future inflation. They would take the perceived future risks of that into account in judging the limited stimulus benefits of QE today. Others, who understand that bank credit creation does not occur via a mechanical multiplication of excess reserves and who are more sanguine about the ability of the central bank to unwind QE when the time comes to do so, see less reason to be worried about future inflation risks. This is a difference in the understanding of the transmission channel of QE and how credit creation occurs, rather than an inflation hawk versus dove issue per se.

A Matter Of Disposition Or Judgment?

Another problem with the hawk-dove categorization is that it conflates disposition with judgment. The implication of labeling someone a hawk or a dove is that he or she is congenitally so. As argued above, most central bankers agree on a basic monetary framework, holding that both above-target inflation and below-target inflation, particularly outright deflation, are undesirable, and that in the long run there is no inflation free lunch when it comes to using monetary policy to try to promote economic, particularly employment, growth. Rather than an underlying congenital disposition, however, disagreements about policy often reflect differences in judgment about the nature and state of the economy and its future path and how monetary policy is likely to influence the latter. Monetary policymakers need to be forward-looking and to make forward-looking decisions about how to alter the path of economic activity and monetary outcomes in the context of uncertainty not just about the current state of the economy, but importantly about the future. Policymakers with similar congenital dispositions, as captured by such labels as hawkish and dovish, can differ substantially in terms of their judgments and therefore their favored policy actions. Such judgmental differences may sometimes partly reflect underlying dispositions but, given the commonality of frameworks and pervasiveness of uncertainty, are likely to swamp those. The economy is humming along at full employment with price stability. Policymaker A wants to hike interest rates, while policymaker B wants to cut them. Does that make A a hawk and B a dove, or does it mean that A sees inflation pressures building and B a dip in activity ahead? Better for central bank watchers to do their homework on that question and report it, rather than lazily fall back on labels. The economy is recovering from a deep crisis, unemployment is high and inflation below target, and the central bank is operating deep in QE/forward guidance territory (sound familiar?). Policymaker C argues for even more QE, while policymaker D wants to call it QE quits. Does that make C a dove and D a hawk on inflation (or C a hawk on deflation and D a dove on deflation)? Or does it mean, because they hold different views on how QE works and/or how the economy is positioned to respond to it, that C views QE as carrying little inflation risk, while D sees an inflation accident waiting to happen? Both hate inflation; they just disagree about its likelihood. Again, the central bank-watching discussion should sensibly be had directly in those terms.

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All Bird-Watching Eyes On Chairman Bernanke's Successor

Who is to take over as the head of a major central bank is always an issue of intense market and public interest. No more so when that central bank happens to be the world's most important one. No wonder the subject of who will succeed Federal Reserve Chairman Ben Bernanke when he likely steps down at the end of January next year elicits so much interest. Rather than engage in the parlor game of who might get the nod, a few observations on the key principles attending a successful handover might add more value. Principles trump personality when it comes to monetary-policy governance. A key issue is whether the choice of a new chairman for the Federal Reserve should aim for a high degree of continuity in policy thinking and action or aim to be a catalyst for a change in the same. The answer to that hinges on a judgment of how appropriate monetary policy has been under the leadership of the outgoing chairman. When it comes to central bank leadership, continuity is golden, but that assumes the central bank is already on the right track (13). In the Fed's case, Chairman Bernanke deserves high marks for overseeing an appropriately aggressive and innovative monetary policy after the crisis. After the worst financial crisis and recession since the Great Depression, the potential and actual threat to the Fed achieving its mandate of price stability and maximum employment came from the downside on both: inflation being below target, with the risk of turning into malign deflation, and unemployment being too high and set to come down only slowly. With the private sector deleveraging and with fiscal policy, after an early spurt, turning to be a drag on growth, the Fed's bold foray into nonconventional monetary policy territory was appropriate and continues to be. That argues for continuity in terms of monetary-policy thinking. There is another very good reason why it is important for whoever is appointed to succeed Chairman Bernanke to provide a high degree of continuity. It is important that the appointment of the new chairperson not undermine the existing forward guidance of the Fed. By definition, forward guidance works only to the extent that the public has confidence that the guidance that the central bank gives today about its future intended actions is indeed a good guide to those future actions. The appointment of a new chairman who felt little ownership of the Fed's existing forward guidance would not only result in a likely change in the policy stance, but could undermine the ability of the institution to make valuable intertemporal commitments. The value of forward guidance rests, to a large extent, on it being (relatively) impervious to changes in the identity of the main monetary policy decision-makers, at least over the horizon of the forward guidance. The U.S. has a unique political system in which the executive branch appoints the top echelon of the administration, with approval by the Senate providing a check and balance. These are commonly termed "political appointments." A piece of societal learning embedded in institutional frameworks throughout the world is that monetary policy decision-making should be concentrated in a specialist, technocratic institution--the central bank--which should have autonomy in decision-making but be accountable to the government: "independent within the government," rather than "independent of the government," as the Fed itself puts it. The Fed, while politically accountable for doing its job, nonetheless has to be able to do its job, and for that it has to be seen as a "technocratic" rather than a "politicized" institution; the key to that is that the chairmanship of the Federal Reserve should not be seen as, or turned into, just another "political appointment:" it needs to be quarantined from the partisan political process. Monetary policy is a

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highly specialist and technical field; the chairman of the Federal Reserve needs to seen by the public and by the markets as a strong, credible figure in the field. It is heartening, and an improbable strength of the U.S. political system, that the presumed candidates to succeed Chairman Bernanke--the half dozen names in play, not to mention the two presumptive front-runners--all fit this description. And this, despite the decibel-charged noise around monetary policy and trenchant criticism of the Fed from some quarters. A credible and successful successor to Chairman Bernanke will defy being labeled a hawk or a dove.

Related Research
Rethinking Monetary Policy: Lessons And Reminders From The Great Financial Crisis, April 3, 2013 Behind The Platinum Coin Ploy: The Monetary Mechanics, Jan. 15, 2013 The Fed: Parsing Its Communications, Jan. 7, 2013 The Fed: Full Steam Ahead, Dec. 31, 2012

Endnotes
(1) I say "kerfuffle" because what the Fed chairman said, in trying to put some more flesh on the bare bones of the asset purchase forward guidance, was hardly radical: "Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program." When the Fed launched its open-ended QE purchases in two steps in September and December 2012, initially set at $85 billion of longer-term Treasury securities and mortgage-backed securities per month, it signaled that it would continue with such purchases (at that or an adjusted level) until "the outlook for the labor market [improved] substantially." The Fed chairman's comments implied it would still be about a year before the FOMC, on its relatively rosy assessment of the outlook for the economy, judged it would be able to tick that box. That's hardly slamming the brakes on. And the chairman was talking about when the flow of incremental QE would come to an end or the point at which a given (huge) stock of QE would be put in place. This is not monetary tightening, but the completion of putting in place a given amount of monetary easing. The economic projections released at the June meeting revealed that FOMC participants had the same distribution of assessments of when the first hike in the federal funds rate would likely to be appropriate as they did at the March meeting, the overwhelming majority (13 out of 19) seeing this as being during 2015.

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(2) See Ben S. Bernanke, "Deflation: Making Sure 'It' Doesn't Happen Here" (November 2001): "[The] U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." (3) Article 127 of the Treaty on the Functioning of the European Union states that: "The primary objective of the European System of Central Banks shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union." These objectives include "[working] for the sustainable development of Europe based on balanced economic growth and price stability [and] a highly competitive social market economy, aiming at full employment and social progress" The Bank of England Act 1998 specifies that: "In relation to monetary policy, the objectives of the Bank of England shall be: (a) to maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment." (4) Article 2 of the Bank of Japan Act 1997 states that: "Currency and monetary control by the Bank of Japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy." Article 4 requires that the BOJ "shall, taking into account the fact that currency and monetary control is a component of overall economic policy, always maintain close contact with the government and exchange views sufficiently, so that its currency and monetary control [shall be compatible with] the basic stance of the government's economic policy." (My tweak on the unofficial translation, as prepared by the Government of Japan, of the original Japanese.) (5) Actually, if mandates are to be tallied, the Federal Reserve has a "triple mandate" when it comes to monetary policy objectives: "maximum employment, stable prices, and moderate long-term interest rates." Chairman Bernanke recently addressed this discrepancy between the common characterization and what is legally mandated: "The dual mandate refers to the first two goals, and the long-term interest rate goal is viewed as likely to emerge from the macroeconomic environment associated with achievement of the employment and price stability goals ... Thus, the interest rate goal of the Federal Reserve Reform Act can be regarded as subsumed within the dual mandate." However, a mandate is a mandate, and it is possible to conceive of circumstances in which the first two goals were being attained but long-term interest rate rose and were no longer moderate. The most likely such scenario would be associated with a default risk premium being priced into the Treasury yield curve. Should such a scenario ever develop, arguably the Fed would seem to have the legal obligation to counter the risk premium as long as it deemed that, by doing so, it was not putting price stability and maximum employment at serious risk. The chairman may be downplaying the potential significance of the third element of the mandate. (6) For instance, see the speech by then Federal Reserve governor, Frederic Mishkin, "Monetary Policy and the Dual Mandate" (April 2007). (7) The vertical Phillips curve has the unemployment rate on the x-axis, the rate of inflation on the y-axis, and the long-run "curve" is vertical at the natural rate of unemployment. The short-term Phillips curve is downward-sloping but

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any attempt by policymakers to exploit that fact by pushing the unemployment rate lower than the natural rate will result in higher inflation, which will be reflected in higher inflation expectations and higher nominal wage demands, but eventually the same real wage and therefore the same equilibrium demand for labor and unemployment rate. This process is captured in the idea that, when policymakers try to exploit the apparent trade-off, the short-term Phillips curve will move out (to the right); the economy reaching a new equilibrium at a point vertically above the starting point. The unemployment rate has not changed (from the natural rate) but the inflation rate is higher and is associated with higher inflation expectations. (8) Also known, in one of the lesser triumphs of acronym-making in economics, as the NAIRU, the "non-accelerating-inflation rate of unemployment." (9) "But this 'long run' is a misleading guide to current affairs. 'In the long run' we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again." John Maynard Keynes (1923): "A Tract On Monetary Reform," chapter 3. (10) The Fed has two good reasons to be impatient to see a faster recovery in the labor market and hence a faster fall in the unemployment rate and rise in the employment rate. High unemployment today causes high social costs today but also impedes longer-term potential growth, causing more permanent social losses. In his Jackson Hole speech in 2011, Chairman Bernanke made this point as follows: "Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment. [This] adds urgency to the need to achieve a cyclical recovery in employment" This comment seems to have laid important intellectual ground for the decisions taken in September and December 2012 putting more explicit focus on speeding up the economic recovery and improving the state of the labor market. (11) For instance, at the time of the September 2012 decision, the U.S. unemployment rate was 8.2% and the core PCE inflation rate was 1.7% year over year (both three-month averages). The latest figures (again, three-month averages) are 7.6% and 1.1%, respectively. The Fed's inflation target is 2%, and the members of the FOMC see the "natural rate of unemployment" (what it terms "the normal unemployment rate over the longer run") as being in the 5%-6% range. (12) To borrow the term applied to the U.S., in the context of the U.S. dollar being the international reserve currency and therefore the U.S. being able to borrow and finance its trade in its own currency. (13) The recent change in governorship of the Bank of Japan (in March this year) is the exception that proves the continuity rule, in my view. The BOJ had long failed to achieve its price stability mandate and had dug itself into a

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self-defeating hole with its stated policy positions and associated monetary policy actions. A radical change in policy message and action was needed, and the change in governor provided the opportunity and catalyst to bring that about. See "What To Look For From The Bank of Japans New Leadership," published Feb. 12, 2013, and "Change Of The Guard--And The Deflation Storyline--At The Bank of Japan," published March 28, 2013, both on RatingsDirect.

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