Quantitative Easing

Hawkish vs. Dovish: definitions, examples and what they mean for investors

If the Fed is hawkish, it has inflation in its sights.

What does Hawkish mean in finance?

The financial world has come to associate the hawk with aggressive monetary policy that favors higher interest rates in order to curb inflation. A hawkish Federal Reserve makes policy decisions that strive to curb rising prices, maintain healthy employment levels, and thus stave off recession.

When a hawk has something in its sights, it seems to be focused only on its prey; To extend the metaphor, some pundits believe that when the Fed embarks on the fight against inflation, it may miss the consequences of its actions on the broader economy, such as a slowing housing market or rising GDP. GDP.

What is Hawkish Monetary Policy? What are some examples?

A hawkish monetary policy, also known as a restrictive monetary policy, is put into practice when a central bank like the Federal Reserve wishes to contract financial liquidity. It does this in several ways:

  1. At its FOMC meeting, the Fed may raise the Fed Funds rate, which is a target interest rate that banks charge each other for overnight lending. Banks, in turn, charge interest to their customers – this rate is known as the prime rate – and so any increase in the Fed Funds rate leads to a corresponding increase in short-term and long-term interest rates.
  2. The Fed may also reduce the amount of Treasuries and mortgage-backed securities it holds through quantitative tightening measures. As its name suggests, this practice tightens the Fed’s balance sheets and helps it achieve its inflation target of 2%.

Why would the Fed need to tighten liquidity? An example of hawkish monetary policy occurred in 1980, when the Fed Funds rate hit a staggering 20%. Federal Reserve Chairman Paul Volcker took a tough stance to fight skyrocketing inflation, known as stagflation, that resulted from an oil embargo in the 1970s.

This embargo raised oil prices from $3 to $12 a barrel and had other negative economic consequences, including increased food and transportation costs and increased union wages. The only way out of a year-long recession was through high interest rates.

What does Dovish mean in finance?

Accommodative (or accommodating) policy is the opposite of hawkish policy and favors expansionary monetary policy to achieve maximum employment levels. The Fed does this by lowering the Fed Funds rate. This has a ripple effect on the economy, making it easier for homebuyers to get a mortgage, for consumers to buy things on credit, and for businesses to get loans to hire more workers. or increase production, etc.

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TheStreet Dictionary Terms

The Fed is walking a fine line when making changes to the fed funds rate; when interest rates are too high, economic growth contracts, the wage bill falls and unemployment rises. On the other hand, if interest rates are too low, shortages may occur and inflation may rise. The Federal Reserve’s mandate is to maintain a healthy economy through stable prices and maximum employment, and to do this it must set interest rates at the right level at the right time.

What is accommodative monetary policy? What are some examples?

Accommodative monetary policy promotes an “easy money” environment, when the Fed Funds rate is lowered, making it easier for businesses and consumers to obtain loans. Quantitative easing is practiced in accommodative times. Consumers spend more and the economy grows.

After the 2007-2008 financial crisis, which stemmed from the implosion of mortgage-backed securities in the United States and impacted global markets, the Fed cut interest rates by 4.5% at the end of 2007 to between 0.0% and 0.25% at the end. of 2008. And between 2008 and 2014, the Fed also launched a series of billions of dollars of quantitative easing measures to increase financial liquidity and encourage lending. During this period, the United States entered a decade-long bull market.

Is the Fed Hawkish or Dovish?

The Fed can be hawkish and dovish; it all depends on where you are in the economic cycle. Dovish Fed chairs tend to allow higher levels of inflation than hawkish Fed chairs.

  • Former Fed Chairman Alan Greenspan was a hawkish hawk in the 1980s, favoring high interest rate policies, while in the late 1990s, during the dot-com bubble, his policies changed and he cut rates.
  • Ben Bernanke, Greenspan’s successor, served as Fed Chairman from 2006 to 2014. During that time, he led unprecedented quantitative easing efforts to ease the financial crisis. It is known to display dovish tendencies.
  • Former Fed Chair Janet Yellen, who was seen as a hawk in the 1990s, supported low interest rates during her tenure from 2014 to 2018 as the economy benefited from a long bull market .

How to invest in a Hawkish market?

When the Fed tightens monetary policy, market volatility often increases. This phenomenon is known as “taper tantrum”, and it sometimes takes another round of quantitative easing for markets to stabilize.

It is always important for an investor to have a solid foundation of portfolio diversification, but this is especially true during times of hawkish monetary policies. Stocks, bonds and inflation-linked value securities (I bonds and TIPS) tend to outperform.

How to invest in a Dovish market?

Assets that generally do well in low interest rate environments thrive during periods of accommodative monetary policies. These can be growth stocks and blue chip stocks. As always, investors should do their homework and check out the fundamentals of a company before investing in it. After all, a well-informed investor is a profitable investor.

What environment are we in right now? Hawkish or Dovish?

The minutes of the May 2022 Fed meeting reveal that the Fed has become decidedly hawkish. James “Rev Shark” Deporre of TheStreet.com sheds light on several investing themes dominating the markets in 2022, and why they shouldn’t drive you crazy.