Hawkish vs. Dovish: Monetary Policy Differences

Hawkish vs. Dovish are terms that have definitely made it to the headlines one way or another and especially in light of the rising inflation and recession fears these past couple of months. 

Perhaps surprisingly, these two terms are used to define one of the world's largest and most influential central bank’s monetary policymakers, the Fed Reserve. So what are hawkish vs. dovish monetary policies exactly, and how do these differ from one another?

TL;DR

• Hawkish describes a monetary policy that favors interest rate hikes to combat inflation.

• Dovish refers to the monetary policy that favors interest rate decreases to boost the economy. 

• Hawkish Fed members are called “hawks,” while dovish Fed members are called “doves.”

• Examples of Fed doves include Minneapolis Fed President Neel Kashkari, San Francisco Fed President Mary Daly, and Fed Governor Michelle Bowman. 

• Examples of Fed hawks include Dallas Fed President Robert Kaplan, 

What Is the Fed Reserve?

The Federal Reserve is the US central banking system and is widely regarded as one of the most famous monetary systems in the world. Its economic policies substantially affect the US market, in particular, and the global markets in general. 

In terms of segmentation, there are 12 Federal Reserve Banks in the US. Each bank is responsible for a specific geographical area and conducts monetary policy supervision, ensures financial stability, and provides banking services. Furthermore, each year, the Fed meetings eight times to decide on interest rates and monetary changes. It is important to note that these meetings play an important role in the economy and are widely anticipated by market watchers, traders, and consumers alike.

What Does Hawkish Policy Mean?

The term hawkish policy refers to the Federal Reserve’s monetary policy-making decisions, especially when it comes to addressing inflation, which has dominated headlines for the past couple of months. As such, a hawk, as described in monetary jargon, is a Federal Reserve monetary policy maker that combats inflation with higher interest rates. This may resonate with how many central banks like the ECB, the Fed Reserve, and the BoE have handled inflation throughout 2022 and 2023.  In other words, hawkish policymakers are compared to hawks, which are birds of prey known for their aggressiveness. 

What Does Dovish Policy Mean?

Unlike hawks, doves or those who hold a dovish monetary stance opt for lower interest rates due to the fact that it is likely to increase the amount of money in circulation. In addition, dovish members prefer to maximize employment rates while supporting economic growth. While hawks are known for being predatory, inflation doves are meeker like pigeons or doves. 

Examples of a Hawkish Policy 

Perhaps one of the most prominent examples of the Fed’s hawkish policies is its monetary tightening trajectory back in 2022. In an attempt to tame record-high inflation, the Fed raised rates by half a percentage point to their highest level in 15 years in December 2022.

Fed members who are hawkish are often referred to as hawks or inflation hawks. Famously known haws include Kansas City’s President, Esther George, Cleveland President Loretta Mester, and Atlanta’s Fed President, Raphael Bostic.

Examples of a Dovish Policy 

While many may be yearning for the Fed to adopt a more dovish tone, one of the most prominent and recent examples of dovishness is not actually related to the Fed but rather to the Bank of Japan (BoJ). Whereas many central banks, including the Fed Reserve, attempted to combat inflation with higher interest rates in 2022, the BoJ remained steadfast with its ultra-dovish tone throughout the year with extremely low rates. It did so with its yield curve control program. (Source: CNBC)

However, despite the fact that the Fed has been more hawkish in recent years, some dovish Fed members include former Fed governor Ben Bernanke and former Fed Reserve Chair Janet Yellen. Both were known for their devotion to keeping interest rates low. Current Fed members who tend to be more dovish include St. Louis’ President James Bullard.  

Advantages and Disadvantages of a Hawkish Policy

The advantages of a hawkish policy are that it may possibly lead to cheaper imports and higher savings rates and can prevent inflation from escalating.

On the flip side, hawks may often be criticized by some for their views due to the fact that they are believed to be compromising economic health by raising interest rates. In other words, some believe that hawks may end up maximizing rates and neglecting employment rates and consumer spending which may lead to deflation, and make the cost of borrowing more expensive.

Advantages and Disadvantages of a Dovish Policy

Some would favor a dovish policy stance because of the possibility that it can increase employment rates and economic expansion. However, on the other hand, this comes with the cost of high inflation. This is because doves often favor employment rather than inflation and, therefore, opt for lower interest rates.

Can Hawks Also be Doves?

It should be noted that Fed hawks can also turn into dovish and vis-a-vis. Take, for example, former Fed Chair Alan Greenspan, who was known to be hawkish in 1987 but became more dovish over time. In addition, many Fed members, including Fed’s Chairman, Jerome Powell, can also be centrists. 

Conclusion

While many think that the Fed may slowly be shifting away from its infamous hawkishness, others posit that this hawkish stance will probably carry through the rest of the year. Nonetheless, whether or not the Fed will ease its monetary tightening is yet to be determined. Traders and investors may have to wait and see what decisions they make in their upcoming meetings this year.

FAQs:

What do "hawkish" and "dovish" mean in monetary policy?

• Hawkish refers to a monetary policy that favors increasing interest rates to combat inflation and slow down economic growth.

• Dovish refers to a monetary policy that favors lowering interest rates to stimulate economic activity, often to increase employment and boost growth.

What is the Federal Reserve (Fed)?

The Federal Reserve (often simply called the "Fed") is the central banking system of the United States. It regulates the U.S. monetary system, supervises financial institutions, and provides key services like controlling interest rates. Its decisions significantly impact the U.S. economy and global financial markets. The Fed holds meetings eight times a year to decide on interest rates and monetary policy.

What is a hawkish policy?

A hawkish policy is one in which the central bank, like the Fed, raises interest rates to control inflation. This approach aims to reduce inflationary pressures by slowing down economic activity. Hawks, as policymakers, focus on maintaining price stability, often at the expense of potentially slower economic growth.

What is a dovish policy?

A dovish policy focuses on lowering interest rates to stimulate the economy, especially by encouraging investment and spending. Doves are generally more concerned with promoting economic growth and reducing unemployment, sometimes at the risk of inflation.