The Chairman of the Federal Reserve, Jerome Powell regularly delivers remarks on the current state of our economy and the Fed’s expectations for interest rates.
During Powell’s speeches and in his discussions regarding monetary policy and interest rates, you may have heard the terms “hawkish” and “dovish” thrown around a ton.
So... What do “hawkish” and “dovish” really mean?
A dovish monetary policy is one that is willing to keep interest rates low in order to stimulate the economy. If you think about it, doves are typically associated with times of peace and prosperity. Considering this, you won’t be surprised to learn that a dovish monetary policy is one in which the central bank seeks to promote economic growth by keeping interest rates low and making credit readily available.
This approach is typically used during periods of high unemployment or slow economic growth. By making borrowing cheaper and more accessible, dovish monetary policy encourages businesses to expand and invest, leading to job creation and increased consumer spending. Additionally, low-interest rates can help to reduce the overall cost of living, giving households more disposable income.
A hawkish monetary policy, on the other hand, is more likely to raise interest rates in order to combat inflation as the hawk is revered as a predatory bird known for its power and agility. When we look at hawkish monetary policy, we associate this with aggressive increases to the interest rates, deflationary monetary policy, and limiting the economy’s expansion.
When it comes to monetary policy, “hawks” are those who believe in tighter money supply and higher interest rates. That’s because inflationary pressures are kept in check when the money supply is tight, and businesses have less money to borrow for expansion. As a result, hawks tend to closely monitor inflationary indicators like the Consumer Price Index (CPI).
In recent speeches by Chariman Powell, the term hawkish would certainly be appropriate. He indicated that slowing and reducing inflation would be the top priority in the short term. Powell recently stated, “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” He later went on to say “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
We’ll include a link in the description of this video for you to check out Powell’s entire 8-minute speech from Jackson Hole. https://www.youtube.com/watch?v=VAqSCcDF21o
To summarize, Hawks and Doves both use the interest rates to achieve their monetary goals. Both types of monetary policy can greatly affect how an investor should approach the market. In a hawkish environment, investors should be cautious regarding volatility and a potential contraction of the equities market. In a dovish environment, investors may see an expansion of the economic cycle, leading to a bull-market.
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