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The hawk flies away
Richmond Fed head Broaddus bows out with some thoughts on inflation.
August 8, 2004: 11:48 AM EDT

NEW YORK (CNN/Money) - J. Alfred Broaddus Jr. is an affable-looking man with a warm smile and the trace of a soft Southern accent -- hardly the image of a tough, unrelenting, anti-inflation hawk.

But in the world of Federal Reserve policy-makers, where fighting inflation became the number one cause of the late twentieth century, that's the reputation that Al Broaddus has earned.

Now he has retired after working at the bank for more than 30 years, first as a young economist, then as a research director, and, for the last 11 years, as president of the Richmond Fed.

I had the opportunity to interview him on his last day at the bank, to ask him what he thinks his legacy is, and what lies ahead for the Fed.

My first question was to what extent the great inflation of the 1970s and 1980s shaped his thinking. (How could it not have had a huge impact? Inflation spiraled to an incredible 13 percent in 1980, and the Fed pushed short-term rates up to nearly 20 percent!)

Looking back, economists say the Fed made mistakes in dealing with the big run-up in oil prices of that era. And, they say, that undermined the financial markets' confidence in policy-makers' will and their ability to do what was needed to slay inflation.

As Broaddus put it: "I think there was just a general feeling that the Federal Reserve didn't have the focus, didn't have the determination to maintain the stable prices that we needed to have."

"At that stage of the game, we really had little credibility in conducting monetary policy. So we had to regain it," he said, adding that there was a big price to pay. "And the price was the deep recession of the early 80s. The lesson I learned is that we don't want to go back again."

So where are we now? Have we achieved price stability, a state defined by central bankers as one where inflation no longer affects the decisions made by consumers and businesses, such as when to boost prices or ask for a raise?

"I think so. I really truly do," he said "We've not only brought the inflation rate down, we've actually flirted with deflation and excessive disinflation."

"There's an old song," Broaddus said. "I've seen it on both sides now or something like that. I think a lot of us in the system feel that way."

He said that core inflation ran around 1.5 percent to 1.6 percent over the past 12 months. When you strip out some factors that bias that number up by about a half-percentage point, "that's a pretty good number," he said.

But the hawk is not about to rest. "The trick is going to be to sustain it," he said, noting that there has been some acceleration in core inflation recently. It is probably temporary, he concluded, "but we can't relax."

Can't relax, indeed. I asked him what he thinks constitutes a "neutral" federal funds rate -- in other words, the level in the Fed's key short-term rate where it no longer stimulates the economy to grow faster.

Broaddus said he puts the "neutral" fed funds rate somewhere in a "3-3/4 to 5-1/4 percent range...something like that is probably neutral.

"We don't know ever exactly precisely where it is, but that clearly we are below it now," he added.

This is certainly in line with mainstream thinking at the Fed, and in the economics profession at large where many say the neutral funds rate is around 3-1/2 percent to 4 percent.

I asked him whether he thinks long-term rates haven't moved up enough so that the Fed perhaps doesn't need to move the key short-term rate up so much. Not a chance.

In fact, he brought the whole subject back to the Fed's credibility as an inflation fighter.

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"So you know if moving back towards neutral on the short end of the yield curve helps to reinforce the credibility of our long-term policies, that will help to contain long-term rates and prevent them from causing any economic problems rather than the other way around," Broaddus said.

A final word to the public?

"I think we have really learned a lot about how to conduct monetary policy effectively to help the economy perform as strongly as it can," Broaddus said. "So my parting thought to the American public would be to give the Fed some credit. We've learned a lot, and I hope the public will have confidence in what we're doing."  Top of page


Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she also contributes to Lou Dobbs Tonight.




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