A Dovish Fed: President Obama Casts His Vote

President Obama has chosen San Francisco Fed President Janet Yellen and two other likely inflation doves to fill the three openings on the Federal Reserve's Board of Governors. That's another sign that if a serious monetary policy conflict arises in the future -- between the Federal Reserve's goal of mitigating unemployment and preventing economic instablity -- the central bank will focus on the former at the expense of the latter.

The policy bias will be to keep goosing the economy first and worry about the long-term damage later. In other words, the status quo.

As the Wall Street Journal reports in a good summary, Yellen never cast a dissenting vote against the prevailing winds in her time as a member of the Board of Governors previously. She walked hand in hand with Alan Greenspan as the then-Fed chief took the U.S. into today's financial abyss with easy money policy.

In a speech last month Dr. Yellen said:

Some people worry that sustained federal budget deficits and the huge increase in the Federal Reserve’s lending and stimulus programs could eventually lead to high inflation. Others take the opposite view, arguing that economic slack and downward pressure on wages and prices are pushing inflation down. I would put myself squarely in the second camp.

Yellen said she favored the Fed's current easy-money stance:

Such accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low. I believe this is not the time to be removing monetary stimulus.

Citing the example of long-running deflation in Japan in her speech last month, she said:

There’s no evidence that big government deficits cause high inflation in advanced economies with independent central banks, such as the Fed...I believe that the more worrisome challenge for price stability over the next few years stems primarily from the sizable amount of slack in the economy.

President Obama's latest selections improve odds the Fed will put (or will be pressured to put) price stability (making sure inflation stays dead) on the back burner (especially as the 2010 and 2012 elections approach) in a way that invites eventual disaster -- a risk I warned about here.

We face the risk of a repeat of past policy mistakes: "Meet the new boss. Same as the old boss."

Invest (or divest) accordingly.