Central Banks exploring 'Doveish' strategies?

The dilemma of reinvigorating the world economy has sparked debate from various economic ideologies over how to manage and improve economic stability and growth. As short-term interest rates are still stuck near zero and their balance sheets filled with government bonds, central banks around the US are pursuing a more "doevish" stance that would entail tolerating temporary higher inflation in return for higher output. This shift in policy goes against the Central Bank's longstanding conservative policy of maintaining low inflation. According to an article in Yahoo! News, Charles Evans, head of the Chicago Fed, said that rates could stay at rock bottom until joblessness falls to 5.5 percent from the current lofty 7.7 percent, as long as inflation expectations remain lower than the Fed's 2-percent goal. Because of this, Evans edges closer to fellow dove's rate-rise plan. Before we go on and analyze the implications of this policy, it is best to familiarize ourselves between these different policies.

Back in January, the Federal Open Market Committee, began a two-day meeting to review everything related to the economy. While much is unknown to the public about the subtleties of these debates, an article by CNBC carefully differentiated between three main groups: 1) the Federal Reserve chairman; 2) a Fed Hawk; and 3) a Fed Dove. A hawk refers to an "economic policy adviser who is concerned primarily about inflation and its effects on society. On the other hand, a dove "prefers low interest rates--thereby boosting economic growth--believing that inflation and its negative effects will have minimal impact on society." The position of Federal Reserve chairman becomes very peculiar in this case, in which the chairman interprets the state of the economy according to these two opposing views and subsequently offers a resolution that is sufficient in reviving it. 

For US Federal Reserve Chairman Ben Bernanke, the challenge to recover from the biggest bubble bust in history will require clear, thoughtful decisions for sustainable economic recovery.  Under Ben Bernanke, he has tried various methods of policy responses to the crisis. Thus far, his strategy for recovery appears to be working as the world's biggest economies are starting to pick up and unemployment is steadily coming down. For many speculators, there is growing confidence that America's recovery is on course, which has sparked a lively debate on whether the Fed needs to starting thinking about withdrawing of some of the stimulus is has provided. This is where the three schools of thought clash. The doves and hawks are continually battling over the US budget deficit. Doves want to delay action to repair America's finance; the hawks say that too much government spending is "crowding out" the private sector, thus stifling the economy. Ben Bernanke is considered a dove, but also agrees with the hawks that the US can return to its former economic glory provided that the right policies are in place.

 America has had a long history of rejuvenating itself from economic woes. However, Thomas Palley notes that there has been a marked difference in the growth paradigms before and after 1980.  Prior to the 1980s, when the economy grew so did the incomes of American middle classes. Everybody gained from improvements in productivity, manufacturing employment rose, and the trade deficit was negligible. After 1980, the gains from productivity were monopolized at the top, manufacturing employment fell, and the boom of 2001-07 was the weakest in postwar history. Palley notes that the post-1980 growth paradigm "involved squeezing worker incomes, squeezing household saving rates, raising debt levels, persistent asset price inflation in excess of consumer price inflation, and reliance on ever lower nominal (ie not adjusted for inflation) interest rates." The desperate attempts by the Fed to kick-start the economy have finally reached its limits. Recently in a press conference, Bernanke stressed the importance of calibrating the bond purchases to the labor market and economic conditions.  When Bernanke and the FOMC will be ready to scale back purchases remains unclear.

My question is how the US Federal Reserve will go forward with economic policy. Are Dove and Hawk policies still relevant to the economic problems we face today? Or is the US Federal Reserve dealing with a growth model that makes either policy irrelevant to the solution?