Inflation Hawk: Dovish and Hawkish Monetary Policy Explained

In some cases, banks end up lending money more freely when interest rates are higher. High rates dissipate risk, making banks potentially more likely to approve borrowers with less-than-perfect credit histories. Moreover, if a country increases interest rates but its trading partners do not, that can result in a fall in the prices of imported goods. These monetary policies are called expansionary monetary policy or stabilization policy. Expansionary monetary policy is when the Federal Reserve tries to stimulate the economy by lowering interest rates. The two terms are often used to describe board members of the Federal Reserve System, especially the 12 people who make up the Federal Open Market Committee (FOMC).

Left unchecked, inflation can be as destructive as high unemployment in a stagnant economy. Economists do not designate themselves as a dove or hawk, rather the media, experts, and fellow economists explain the actions of an individual as either dovish or hawkish. Therefore, switching between supporting dovish or hawkish monetary policy sometimes occurs. 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 policies can also impact domestic manufacturers and trade. 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. Monetary policy includes the policies set by a nation’s central bank.

  1. A hawkish stance is when a central bank wants to guard against excessive inflation.
  2. Officials that follow a middle path, neither particularly hawkish nor very dovish, are called centrists.
  3. 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.
  4. It is not uncommon for the media to change their designation of someone from dove to hawk or hawk to centrist.
  5. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only.

Although a lower interest rate will usually weaken a currency, what also matters is the interest rate, relative to the interest rate of other countries. It can also depend on the amount of the increase, the post-increase rate relative to other countries and if the increase was expected or not. International investors will move their money to a place where they can get higher interest rates. Hawkish policies tend to favor savers and lenders (who can enjoy higher interest rates).

Dovish vs Hawkish: Key Monetary Policy Differences

So, as you probably know by now, a dovish monetary policy will lead to lower interest rates (or an equivalent action) and a possible weakening of the country’s currency. In order to moderate the rise in prices and wages, this tendency will pursue higher interest rates and a tighter money supply. Officials that follow a middle path, neither particularly hawkish nor very dovish, are called centrists. And depending on circumstances, hawks may change their style and become dovish and vice versa.

So they try to keep the economy growing at more reasonable pace by being hawkish, or watching over inflation. 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 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.

Remembering the Definition of Dovish

Whether being hawkish is a good or appropriate stance will depend on the strength of the economy and other macroeconomic factors. This is because hawkish policies that can lower inflation can also lead to economic contraction and higher unemployment, and can sometimes backfire and lead to deflation. Slowly but surely, the hawks have come out, calling for tighter monetary policy with rate hikes to tap the brakes on the economy so that inflation suddenly doesn’t take off.

Doves, Consumer Spending, and Inflation

Hawks and doves both use interest rates to achieve their policy goals. A hawk, on the other hand, pursues a policy of contraction, keeping interest rates high. Doves prefer low interest rates as a means of encouraging economic growth because they tend to 11 best online brokers for stock trading of march 2021 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.

In contrast, low interest rates entice consumers into taking out loans for cars, houses, and other goods. 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. These aren’t the only instances in economics in which animals are used as descriptors.

The U.S. central bank, the Federal Reserve, has two primary goals—to stabilize prices and maximize employment. While both are deemed equally important to the Fed as a part of their dual mandate, the policies that support price stability differ from those that maximize employment. Some economists tend to focus more on one of the goals than the other. If an economist focuses more on maximizing employment, they are deemed a dove. An example of a dovish economist is Janet Yellen, who was the Federal Reserve chairperson from 2014 to 2018 and currently serves as the Treasury Secretary. She has been described as a dove in the media because of the low interest rates maintained during her time as chair.

By December of 2008, the Fed had effectively cut short-term interest rates all the way to 0%. Yet markets have started to look beyond the Fed’s current tight monetary stance and are pricing in future rate cuts. If economists had to summarize Fed Chair Jerome Powell’s Jackson Hole speech in one word, they’d likely go with hawkish. If you were confused between hawkish and dovish before, I hope that this post cleared things up.






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