Dovish vs. Hawkish
Dovish vs. Hawkish policies influence currency rates through a mechanism central banks like to call “maturity guidance.” Central bank policymakers determine whether to raise or lower interest rates, which has a significant impact on the foreign exchange market. Policymakers raise interest rates to prevent the economy from overheating (prevent inflation from rising too high) and lower interest rates to stimulate the economy.
Read more information about the difference between hawkish and dovish in this article.
What Does Hawkish And Dovish Mean?
What Does Hawkish Mean?
Policy hawks and policymakers tend to be primarily concerned about the risk of inflation. They try to cover up prices and wage increases by raising interest rates, reducing the money supply, and limiting the growth of the economy.
What Does Dovish Mean?
A dovish policy or policymaker will work to promote economic growth as opposed to limiting it. This is accomplished by adopting a looser monetary policy that tends to expand rather than contract the money supply. To achieve this, dovish policy makers mostly cut interest rates.
Who Decides Monetary Policy?
The Federal Reserve’s actions and communications to advance maximum employment, stable prices, and moderate long-term interest rates, the three economic objectives that Congress has directed the Federal Reserve to pursue, combine to form monetary policy in the United States.
How Come the Fed Would Adopt a Hawkish Position?
When monetary policy advisers in the banking or government sectors are characterized as favoring a hawkish or contractionary monetary approach, it’s typically because they want to reduce the money supply to safeguard the economy from inflation and advance price stability.
How Come the Fed Would Adopt a Dovish Position?
A hawkish monetary policy is the antithesis of a dovish or expansionary monetary policy. In order to encourage economic growth, the FED may opt to decrease interest rates, buy government securities from other central banks, and ease bank reserve requirements if it is concerned about the state of the economy. Or, if it believes that employment and growth are on track, it may decide to maintain the same interest rates.
Can You Be Hawkish vs Dovish at the Same Time?
The answer is an absolute YES. With regard to monetary policy, some economists as well as FOMC members have a neutral view that is not entirely hawkish or dovish. Because they don’t seem to prioritize one economic goal over another.
What Are the Effects of Hawkish vs. Dovish Policies on Investors, Spenders, and Savers?
For Savers
If the Fed increases or decreases interest rates, you might not immediately notice a difference because savings account rates are only tangentially related to those rates. However, financial institutions may act to safeguard their profits when the Fed decreases the federal funds rate by reducing the income on high-yield savings accounts, money market accounts, and certificates of deposit (CDs).
For Spenders
The federal funds rate is often used as a reference rate or rate for auto loans, home equity lines of credit, credit cards, etc. The increase or decrease in bank interest rates can indirectly affect the basic interest rates that banks offer to their customers.
For Investors
Any investment’s response to adjustments in interest rates made by the Fed is not guaranteed. Bonds are one type of asset that may be affected more severely than others. However, almost all of your investments could be impacted.
The Bottom Line
According to Fed Chair Jerome Powell, there won’t be any interest rate increases until 2023. But if inflation turns out to be a problem in the future, the Fed might adopt a more hawkish stance and raise interest rates to control expenditure. In each case, customers should consider the potential implications for their plans to invest, save, or make significant purchases.
Article Source: https://libraryoftrader.net/dovish-vs-hawkish
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