Dovish vs Hawkish: Meaning, Differences and its Impact on your Trading

Introduction

There’s a possibility that you have heard a financial news reporter utter something along the lines of:

The central bank governor came out slightly hawkish today after bouts of strong economic data

The terms Hawkish and Dovish refer to whether central banks are able to tighten (hawkish) or accommodate (dovish) their monetary policy.

Central bank policy makers decide whether to increase or reduce interest rates, which have reasonable effect on the forex market. Policy makers increase interest rates to avoid the overheating of an economy (to deter inflation from moving too high). They reduce interest rates to improve an economy (to avoid deflation and improve GDP growth).

Hawkish and dovish policies have enormous effect on currency rates via a mechanism central bankers. They often regard to it as “forward guidance”. This is policy makers attempting to be as open as possible in their communications to the market. This communicate the direction that monetary policy is taking.

What does Hawkish mean?

The term hawkish simply means contractionary monetary policy. Central bankers are hawkish if they say things like tightening monetary policy by increasing interest rates or decreasing the balance sheet of the central bank. A monetary policy stance qualifies as hawkish if it predicts future interest rate increases. Central bankers are hawkish when they are optimistic about the economic growth appearance and anticipate inflation to increase.

Currencies appears to move the most when central bankers move tones from dovish to hawkish or vice versa. For example, if a central banker was recently dovish, saying that the economy still needs stimulus and later, in a subsequent speech, says that they have seen inflation pressures increasing and powerful economic growth, you could observe the currency rising against other currencies.

Generally, words used that goes along the lines of: powerful economic growth, inflation increasing, decreasing the balance sheet, tightening of monetary policy, and interest rate shoots high, lean in the direction of a hawkish monetary policy outcome.

What does Dovish mean?

Dovish refers to the inverse. When central bankers are talking about decreasing interest rates or increasing quantitative easing to improve the economy, they qualify be dovish. If central bankers are not hopeful about economic growth and anticipate inflation to reduce or turn into deflation and they communicate this to the market via their projections or forward guidance, they are regarded to be dovish with the economy.

Some words associate to dovish monetary policy, including:

• weak economic growth
• inflation reducing (deflation), (negative inflation)
• increasing the balance sheet
• loosening of monetary policy
• interest rate cuts

What is the Dovish View of Monetary Policy?

The term ‘dove’ is popular in the United States where it is used to refer to nominees and members of the Federal Reserve Board of Governors. These are the people who have major influence on the United States monetary policies. Doves backs up the idea of low-interest rates since they are of the impression that it allows for economic growth. They equally debated that an increase in economic growth results to a high rate of borrowing among the consumers, which promotes spending. Therefore, doves are of the opinion that low-interest rates have few negative impact.

What is the Hawkish View of Monetary Policy?

The term ‘hawk’ can be used in different contexts. We have managed to give explanation to the popular context but it can also refer to someone who is predominantly fixed on a certain aspect of an endeavor or a pursuit. Hawks have their specific attention different from others. For example, inflation hawks are fixed on interest rates, budget hawks pays attention on the federal budget, among others. On the contrary, while a hawk pays attention to high-interest rates, a dove prefers monetary policies which generally support low-interest rates. Doves are financial advisors or policymakers who are of the opinion that lower interest rates will give rise to an increase in employment, they cherish economic indices like low unemployment over maintaining low inflation.

Examples of Dove

Doves in the United States refer to Federal Reserve members who are saddled with the responsibilities of setting interest rates. The term may also refer to politicians or economists who fights for the same thing. A good example of a dove is Ben Bernanke and Janet Yellen. These two qualify as doves because of their sacrifice to helping the low-interest rates. Another example of a dove is Paul Krugman, an economist who is known to fight for the same thing.

Doves versus Hawks

While the doves fails to see low-interest rates as a problem, they are also of the opinion that keeping low interest rates may increase inflation. Hawk is the inverse of dove. Hawks are those set of people who believe that higher interest rates minimizes inflation. The doves supports expansionary monetary policies, while hawks favor tight monetary policies. Unlike doves who support quantitative easing, hawks are generally against it. They perceive it as a means of distorting asset markets. Additionally, they usually project an increase in future inflation. Hawks perceive the chances of inflation increasing risks in the overall economy. So, this is their reason for the need to tighten monetary policies.

Can Hawks Be Doves? Can Doves Become Hawks?

Hawks can become doves. For example, Alan Greenspan, former chairman of the Federal Reserve between 1987 and 2006, was partly hawkish in 1987, backing up high-interest rates policies. But that stance changed, he begin to support low-interest rates (dovish) in his views of the Fed’s policies. This stance changes remained through the 1990s. Also, the successor of Greenspans as chairman in person of Ben Bernanke, had also displayed hawkish and dovish possibilities in his outlook of monetary policies.

Dovish and Hawkish Language

Usually bankers use dovish language to explain statements. Dovish statements are those statements that insinuates that inflations effects are inconsequential.

For instance, the Federal Reserve Bank may use dovish language to explain inflation. When people use such language, it denotes that the impact are little. There is unlikelihood of the bank taking strong measures. While people use hawkish language to explain statements associated with inflation, the likelihood that the bank will take strong measures is huge.

When Policymakers Are Hawkish or Dovish

As a group, government monetary policymakers tend to become hawkish and dovish in response to economic cycles. For instance, when the economy tends to be going into a recession, monetary policies are likely to advocate for lower interest rates, a looser money circulation and more consumption and hiring. In other words, a dovish response. If, on the other hand, the economy has been enlarging for a sometime and inflation is beginning to increase, a hawkish tendency is likely to become more visible. In order to regulate the rise in prices and wages, this tendency will chase after higher interest rates and a tighter money circulation.

Conclusion

Hawkish policymakers tend to pay attention on managing inflation as a primary goal of monetary policy. Dovish policies are more interested with improving economic growth and job creation. Hawks and doves both use interest rates to reach their policy goals. Hawks generally try to raise interest rates, which controls inflation. While doves want rates to come down. This allows consumers to purchase goods and services and businesses to invest in hiring and manufacturing facilities.