Here's what being 'hawkish' or 'dovish' on monetary policy means
“That sounds hawkish.”
“No, that sounds dovish.”
“But the stock market says it’s hawkish.”
Just what the heck is this nonsense about birds, and why do Wall Street types love to throw these terms around?
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.
Let’s unpack this a little.
What it means to be dovish
When monetary policy is dovish, it means that policymakers favor looser, more accommodating policy, because they want to stimulate growth in the economy. The folks at the Federal Reserve accomplish this primarily by lowering interest rates.
You may be able to see how lower interest rates would be stimulative:
When mortgage rates are lower, it becomes cheaper to finance a house.
When auto loan rates are lower, it becomes cheaper to finance a car.
When credit card rates are lower, it becomes cheaper to buy whatever you want.
When municipal bond rates are lower, it becomes cheaper for governments to finance things like roads and bridges.
All of that sounds great. 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. After all, one of the Fed’s mandates is to promote maximum employment.
Why you need hawkish policy sometimes
The problem with the good times is that too much good times can be a bad thing.
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. All of this means prices go up.
And when prices go up, you have inflation. And when inflation runs high, you get all sorts of problems. For example, if you are a business owner, imagine the nightmare that comes with having to plan a budget or long-term business strategy. 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. All of this makes a mess of the economy.
One way to pull in the reins of inflation is to employ hawkish monetary policy, which is usually achieved by tightening monetary policy with higher interest rates. This cools economic activity a bit, and importantly, it keeps inflation in check.
Another one of the Fed’s mandates is to promote stable prices. And so it very much is their job to be hawkish when necessary.
Where we are today
During the financial crisis, the Federal Reserve became increasingly dovish in its effort to keep the economy from sinking further into its depression-like recession. By December of 2008, the Fed had effectively cut short-term interest rates all the way to 0%.
You could argue this helped. Since then, unemployment has fallen, consumer sentiment has improved, and stock prices have climbed.
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. Indeed, back in December 2015, the Fed hiked rates for the first time since the financial crisis.
But the doves have a very strong case for keeping monetary policy loose. For one, much of the rest of the world is growing very slowly, which is a risk to the US economy. Importantly, most measures of prices signal little to no inflation for now or even in the near future.
And so, people around you will continue to parse the words of the monetary policymakers, debating whether or not what they said was hawkish or dovish, as they attempt to figure out what’s next for the world.
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Sam Ro is the managing editor of Yahoo Finance.
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