Key Questions: Bird Watching - How Do You Spot Hawks and Doves?

Turn on any financial news program these days and you are likely to hear about current policy opinions for major central banks like the Federal Reserve, the ECB (European Central Bank), and the BOJ (Bank of Japan). Economic commentators and policymakers often describe central bank policy and language as “hawkish” or “dovish” and these terms are used to explain how officials are prioritizing risks in the economy. The recent U.S. Senate confirmation of Kevin Warsh to succeed outgoing Chairman Jerome Powell at the Federal Reserve Board will likely amplify the debate over hawkish/dovish policy. Understanding the difference is important for interpreting monetary policy changes and how they can affect interest rates, borrowing costs, jobs, and markets.

The Core Distinction

• Hawkish policy places greater emphasis on containing inflation and maintaining price stability.
• Dovish policy places greater emphasis on supporting economic growth and employment.
   

Policymakers and central bankers typically move along a spectrum between these views as economic conditions evolve. Being a hawk or a dove is not a fixed ideology, rather a position that changes due to a myriad of economic conditions that are reported daily. Further, the U.S. Federal Reserve (and most central banks) operates under a dual mandate that attempts to balance price stability and full employment, which can create friction when deciding which goal is more important at a given time. A central bank that skews more to price stability would be viewed as more of a hawk and one that favors full employment would likely be considered a dove.

A common analogy used when describing the difference between the two policy approaches is that of controlling the speed of a car. A hawkish approach is akin to applying the brakes to keep the economy from overheating. A dovish approach is like applying gentle acceleration to support economic momentum. Both adjustments are part of maintaining long-term stability.

Hawkish Policy Approach

When the economy starts to show signs of overheating, you often hear central bankers refer to elevated inflation, rising wages, and strong consumer consumption. A hawkish policy focuses on fighting inflation and slowing price increases and is often associated with higher interest rates. This can slow borrowing and spending in the short term as a central bank withdraws a cheap source of funding to banks and the markets with a goal of preserving purchasing power over time.

Dovish Policy Approach

If the economy begins to weaken and the unemployment rate begins to rise, policymakers might begin to cut interest rates to spur borrowing, spending, and hiring. This would be a dovish response to market conditions that focuses on supporting economic growth and job creation. This policy approach is associated with lower interest rates and may allow inflation to run somewhat higher during periods of weakness.

The goal of the U.S. Federal Reserve is long-term inflation near 2% while keeping the unemployment rate as low as possible. When inflationary pressures increase, policymakers may adopt a more hawkish posture and when economic growth slows or labor markets weaken, a more dovish posture may be favored. Policy decisions try to reflect a measured balance rather than an extreme position. Shifts in that balance will occur based upon changes in economic data that highlight growth, inflation, and labor conditions. 

Hawkish and dovish policy stances reflect how policymakers balance inflation risks and economic growth, adjusting their approach as conditions change. However, it is important to note that economic conditions, not avian labels of policymakers, ultimately drive policy decisions. These policy stances influence the consumer in many everyday applications, from interest rates on credit cards, car loans, and mortgages to savings and investments. Understanding these terms can help provide context for market movements and policy announcements that help businesses and consumers plan for their financial future.

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