Dovish vs Hawkish: Key Monetary Policy Differences

If you are a consumer, imagine going to the grocery store knowing that next week the price of everything will be higher. Suddenly, you’re buying a thousand rolls of toilet paper today and hoarding it. In the context of finance and the economy, this has to do with monetary policy, which means it involves interest rates, which matters to mom, pop, Joe six-pack, and everyone in between. Loretta Mester, the Cleveland Fed president, also fits into this category. Mester studied under Charles Plosser, the former president of the Fed Bank of Philadelphia and a committed hawk. She worries about inflation caused by the low interest rates championed by doves.

Although it is common to use the term “hawk” as described here in terms of monetary policy, it is also used in a variety of contexts. In each case, it refers to someone who is intently focused on a particular aspect of a larger pursuit or endeavor. A budget hawk, for example, believes the federal budget is of top indicators for a scalping trading strategy the utmost importance—just like a generic hawk (or inflation hawk) is focused on interest rates. A war hawk, similarly, pushes for armed conflict to resolve disputes as opposed to diplomacy or restraint. A hawk generally favors relatively higher interest rates if they are needed to keep inflation in check.

  1. If you’re an animal lover and want to dig deeper into hawks and doves.
  2. Hawks can be hard on people who are looking for work, because employment doesn’t tend to increase as quickly (or at all) when hawks are in control.
  3. Then on the 28th of November, the FOMC released their statement of monetary policy in which Jerome Powell said he saw rates at “just below neutral”.
  4. Keep reading to learn more about hawkish and dovish policies and how to apply this knowledge to your forex trades.
  5. About 2015 policymakers turned somewhat more hawkish and began raising rates, partly in order to have room to lower them in the event of another economic downturn.
  6. Central bankers can be viewed as either hawkish or dovish, depending on how they approach certain economic situations.

Doves tend to support low interest rates and an expansionary monetary policy because they value indicators like low unemployment over keeping inflation low. If an economist suggests that inflation has few negative effects or calls for quantitative easing, then they are called a dove or labeled as dovish. Federal Reserve Chairman, Jerome Powell, stated that “we’re a long way away from neutral at this point” which the market perceived as hawkish (2 Oct 2018).

Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved. We just learned that currency prices are affected a great deal by changes in a country’s interest rates. Imagine a situation where everyone feels rich and feels like they can buy up everything. People who are selling goods will pick up on this and they’ll start raising prices. Meanwhile, companies already have to make more stuff to meet demand, which means they have to hire more and more people. As the pool of qualified labor shrinks, employers have to pay up to hire.

Can hawks become doves and vice versa?

The former is needed to spur and grow the economy when it is slow or in a recession. A contractionary monetary policy is one where the economy needs to slow down or curb high inflation. Adding to this are macroeconomic factors created by an expanding money and credit supply where the value of the dollar is going down because they are plentiful. This makes the input costs for products dependent on supply chains in another currency more expensive in dollars.

When Policymakers Are Hawkish or Dovish

Generally, words used that indicate increasing inflation, higher interest rates and strong economic growth lean towards a more hawkish monetary policy outcome. You have probably heard a financial news presenter say something along the lines of “The central bank governor came out slightly hawkish today after bouts of strong economic data”. The terms Hawkish and Dovish refer to whether central banks are more likely to tighten (hawkish) or accommodate (dovish) their monetary policy.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he added. A slight shift in tone from a central banker could have drastic consequences for a currency. Traders often monitor Federal Open Market Committee meetings and minutes to look for slight changes in language that could suggest further rate hikes or cuts and attempt to take advantage of this.

You’ll find many a banker “on the fence”, exhibiting both hawkish and dovish tendencies. However, true colors tend to shine when extreme market conditions occur. The Bank of England could be described as being hawkish if they made an official statement leaning towards the increasing of interest rates to reduce high inflation. We really just meant hawks versus doves, central bank hawks versus central bank doves that is. While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say is only not ignored, but revered like the gospel. For example, if you are a business owner, imagine the nightmare that comes with having to plan a budget or long-term business strategy.

Hawkish vs. Dovish Central Banks

Keep reading to learn more about hawkish and dovish policies and how to apply this knowledge to your forex trades. It is the Fed’s responsibility to balance economic growth and inflation, and it does this by manipulating interest rates. Hawks and doves is a way to categorize how government officials view foreign policy. Those who seek an aggressive policy based on strong military power and other means are known as hawks, whereas doves seek a less aggressive foreign policy with reduced military power. In the United States, doves tend to be the members of the Federal Reserve who are responsible for setting interest rates, but the term also applies to journalists or politicians who lobby for low rates as well. Previous Fed chairs Ben Bernanke and Janet Yellen were both considered doves for their commitment to low interest rates.

Pros and Cons of Hawkish Policy

When the home currency strengthens, the prices of imported foreign goods become relatively cheaper, hurting domestic producers. At the same time, domestic exports become relatively more expensive for overseas consumers, further hurting domestic manufacturing. Currencies tend to move the most when central bankers shift tones from dovish to hawkish or vice versa. Inflation hawks adopt policies to quickly stamp out inflation, such as aggressively raising interest rates and other contractionary measures. Inflation hawks believe that low target inflation rates, around 2% to 3%, should be maintained, even it comes at the expense of economic growth or employment.

A dovish policy or policymaker will attempt to encourage rather than restrain economic growth. This is done by means of a looser monetary policy, one that tends to increase the money supply instead of restricting it. The main way dovish policymakers work to accomplish this goal is by lowering interest rates.

The opposite of a hawk is known as a dove, or an economic policy advisor who prefers monetary policies that involve low interest rates. Doves typically believe that lower rates will stimulate the economy, leading to an increase in employment. Doves prefer low interest rates as a means of encouraging economic growth because they tend to increase demand for consumer borrowing and spur consumer spending. As a result, doves believe the negative effects of low interest rates are relatively negligible; however, if interest rates are kept low for an indefinite period of time, inflation rises.

If you’re an animal lover and want to dig deeper into hawks and doves. Since then, unemployment has fallen, consumer sentiment has improved, and stock prices have climbed. It’s great for business, and it means a lot more jobs will need filling. In fact, it sounds so great that you have to wonder why we’d ever want anything but dovish policy.

Lower borrowing costs also makes it less costly for businesses to take out loans to support their expansions. One major effect of an expanding economy is more jobs and less unemployment. However, an expanding economy also tends to lead to higher prices and wages.

Realistically, the people of the United States—investors and non-investors alike—want a Fed chair who can switch between hawk and dove depending on what the situation calls for. They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action. Powell mentioned inflation 44 times in his nearly 1,300-word speech, making it the top buzzword. If economists had to summarize Fed Chair Jerome Powell’s Jackson Hole speech in one word, they’d likely go with hawkish. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns).


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