What is Dovish / Hawkish?
Overview on Dovish / Hawkish
Recent monetary policy decisions by the Federal Reserve to raise interest rates have prompted financial pundits to start using all of those big words that make them sound like they know what they’re talking about while the rest of us are left scratching our heads. Have no fear, we will try and make some sense of it for you.
U.S. monetary policymakers are often described as being either hawkish or dovish.
The two terms are often used to describe board members of the Federal Reserve System The terms refer to different viewpoints on the way monetary policy should influence the economy. Hawks are primarily concerned about limiting inflation. They trend toward raising interest rates to restrict the supply of money. Doves, on the other hand, typically try to get interest rates to go lower. They want an increase in the money supply, more economic growth and, particularly, more jobs.
At the root of the dove-hawk distinction lies the central bank’s dual mandate: stable prices and maximum employment. Pursuing both goals requires a balancing act of keeping a lid on inflation by tightening interest rates so prices are stable (Hawkish) and easing interest rates to achieve maximum employment (Dovish).
Government monetary policy was strongly dovish in the wake of the 2008 financial crisis, as policymakers kept interest rates close to zero for several years. Around 2015 policymakers turned more hawkish and began raising rates in order to have room to lower them in the event of another economic downturn. The economic impact of the COVID pandemic has recently encouraged a return to a dovish approach to monetary policy. However, now that we are on the other side of the pandemic, the hawks have rerturned and are discussing raising interest rates to help control rising inflation.
Dovish / Hawkish Details
Dovish
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.
When interest rates are lower, it makes it less costly for consumers to borrow to purchase goods and services. This tends to increase demand, motivating businesses to invest in hiring more workers and expanding their production facilities. Lower borrowing costs also makes it less costly for businesses to take out loans to support their expansions.
Hawkish
Hawkish policies and policymakers tend to be mostly concerned about the risk of inflation. They try to keep a lid on rising prices and wages by increasing interest rates, reducing the supply of money and limiting the growth of the economy.
When interest rates rise, borrowing becomes more expensive and consumers and businesses are less likely to take out loans to make purchases and investments. Restraining consumption helps keep a lid on price increases, and limiting hiring by businesses similarly limits wage growth.
Dovish / Hawkish Conclusions
Hawkish policymakers tend to focus on controlling inflation as a primary goal of monetary policy. Dovish policies are more concerned with promoting economic growth and job creation. Hawks and doves both use interest rates to achieve their policy goals. Hawks generally seek to raise interest rates, which curbs inflation, while doves want rates to go down, which spurs consumers to buy goods and services and businesses to invest in hiring and production facilities.
Happy Trading, Verdia
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