Inflation Hawk: Dovish and Hawkish Monetary Policy Explained

Updated May 10, 2024

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What Is an Inflation Hawk?

An inflation hawk, also known in economic jargon as a hawk, is a policymaker or advisor who is predominantly concerned with the potential impact of interest rates as they relate to 澳洲幸运5官方开奖结果体彩网:monetary policy.

What does it mean to be hawkish? Hawks are seen as willing to allow 澳洲幸运5官方开奖结果体彩网:interest rates to rise in order to keep 澳洲幸运5官方开奖结果体彩网:inflation under control, e♓ven if it means sacrificing economic growth, consumer spendiꦡng, and employment.

A hawk can be contrasted with a dove.

Key Takeaways

Hawks are policy makers and advisors who favor higher interest rates to keep inflation in check.
Inflation can occur when economic growth “overheats,” which higher interest rates are thought to moderate.
The opposite of a hawk is a dove, who prefers an interest rate policy that is more accommodative to stimulate spending in an economy.
Depending on the state of the U.S. economy, policy makers may shift between a hawkish or dovish stance.

Understanding Inflation Hawks

A hawk generally favors relatively higher interest rates if they are needed to keep inflation in check. In other words, hawks are less concerned with 澳洲幸运5官方开奖结果体彩网:economic growth and more focused on the potential of 澳洲幸运5官方开奖结果体彩网:recessionary🌊 pressure brought to bear by high inflation rಞates.

Whether being hawkish is a good or appropriate stance will depend on the strength of the economy and other 澳洲幸运5官方开奖结果体彩网:macroeconomic factors. This is because hawkish policies that can lower inflation can also lead to economic 澳洲幸运5官方开奖结果体彩网:contraction and higher 澳洲幸运5官方开奖结果体彩网:unemployment, and can sometimes backfire and lead to 澳洲幸运5官方开奖结果体彩网:deflation.

Although it is common to use the term “hawk” as described here in t🧜erms of monetary policy, it is also used in a variety of contexts. In each case, it refers to someone who is intently focused on a particular aspect of a larger pursuit or endeavor. A budget hawk, for example, believes the federal budget is of the utmost importance. A war hawk, siཧmilarly, pushes for armed conflict to resolve disputes as opposed to diplomacy or restraint.

Tip

The opposite of a hawk is known as a dove, or an economic policy advisor who prefers 澳洲幸运5官方开奖结果体彩网:monetary policies that involve low interest rates. Doves typically belieꦇve that lower rates will st🥀imulate the economy, leading to an increase in employment.

Advantages and Disadvantages of Ha♏wkish Policies

Advantages

Although the term “hawk” is often levied as an insult, high interest rates can carry economic advantages. While෴ they make it less likely for🅰 people to borrow funds, they make it more likely that they will save money.

In some cases, banks end up lending money more freely when interest rates are higher. High rates dissipate risk, making banks potentially more likely to approve borrowers with less-than-perfect credit histories. Moreover, if a country increases interest rates but its trading partners do not, that can result in a fall in the prices of imported goods.

Disadvantages

Higher interest rates can become deflationary, making prices cheaper. While this can be a short-term positive, 澳洲幸运5官方开奖结果体彩网:deflation can often be worse than moderate inflation in the long run. Persistent deflation means that a dollar tomorrow will be worth more than one today, and worth even more in a week or a month. This incentivizes people to hoard money and put off large purchases until much later, when ostensibly𓂃 ꦓthey will be even less expensive in terms of the dollar’s greater purchasing power.

With higher interest rates, consumers wi𓆉ll borrow less and spend less on credit. Higher mortgage rates will also put a damper on the housing market and can cause housing prices to fall in turn. Higher rates on car loans can have a similar effect on the automobile market.

Hawkish policies will likewise tend to reduce a company’s desire to borrow and invest, as the cost of loans and interest rates on bonds rise. Moreover, companies will be less eager to hi🧔re and retrain wo๊rkers in such an environment.

Hawkish policies can also impact domestic manufacturers and trade. If the relative inflation rate in the home country is falling relative to the inflation rate in a trading partner, the 澳洲幸运5官方开奖结果体彩网:exchange rate should adjust to keep prices in line with the dollar 澳洲幸运5官方开奖结果体彩网:appreciating relative to the trading partners. When the home currency strengthens, the prices of imported foreign goods become relatively cheaper, hurting domestic producers. At the same time, domestic exports become relatively more expensive for o♍verseas consumers, further hurting domestic manufacturing.

Important

Hawkish policies tend to favor savers and lenders (who can enjoy higher i💯nterest rates). They also make imports and traveling abroad cheaper. Hawkish policies tend to negatively impact borrowers and domestic manufacturers. They also make exports and domꦉestic tourism more expensive.

Pros and Cons of Hawkish Policy

Pros

澳洲幸运5官方开奖结果体彩网:Can stem runaway inflation
澳洲幸运5官方开奖结果体彩网:Increases the savings rate
澳洲幸运5官方开奖结果体彩网:Cheaper imports
Tou🙈rists to foreign destinations have greater ღpurchasing power

Cons

澳洲幸运5官方开奖结果体彩网:Can hurt domestic producers
Makes bo൩rrowing more expensive for consumers and firms
澳洲幸运5官方开奖结果体彩网:Can lead to deflation

Fast Fact

These aren’t the only instances in economics in which animals are used as descriptors. Bulls and bears are also used—the former refers to a market affected by rising prices, while the latter is 𒈔typically one where prices are falling.

Why Is It Called "Hawkish"?

Hawks and hawkish policy are more aggressive in nature, whether in terms of monetaಌry policy or military stance during a potential conflict. It is named after hawks, the aggressive birds of prey.

The opposite are a dove and dovish policie🅰s, seen as more meek or conservative. These epitomize peaceful symbolism.

Can Hawks Become Doves and Vice Versa?

Yes, as ℱthe recent history of U.S. Fed leadership shows.

Alan Greenspan, who served as chair of the Fed from 1987 to 2006, was considered to be fairly hawkish in 1987, but he changed over time to a relatively dovish stance. 澳洲幸运5官方开奖结果体彩网:Ben Bernanke, who served i🥂n the post from 2006 to 2014, also alternated between hawkish and dovish tendencies.

澳洲幸运5官方开奖结果体彩网:Janet Yellen, Fed chief from 2014 to 2018, was generally seen as a dove who was committed to maintaining low lending rates. 澳洲幸运5官方开奖结果体彩网:Jerome Powell, named to ꦦthe post in 2018, was rated as neutral (neither hawkish nor dovish) by the Bloꦡomberg Intelligence Fed Spectrometer.

How Are Interest Rates Determined?

At eight annual meetings, a group from the Fed examines economic indicators such as the 澳洲幸运5官方开奖结果体彩网:Consumer Price Index (CPI) and the 澳洲幸运5官方开奖结果体彩网:Producer Price Index (PPI) and determines if interest rates should go up or down, or stay the same. Those who support high rates are hawks, while those who favor low rates are lab𝐆eled doves.

High interest rates make 澳洲幸运5官方开奖结果体彩网:borrowing less attractive. As a result, consumers become less likely to make large purchases or take out credit. The lack of spending equates to lower demand, which help🍨s to keep prices stable and prevent inflation.

In contrast, low interest rates entice consumers into taking out loans for cars, houses, and other goods. ဣConsumers spend more, and, ultimately, inflation occurs.

It is the Fed’s responsibi⛦lity to balance economic growthꦫ and inflation, and it does this by manipulating interest rates.

The Bottom Line

Inflation hawks adopt policies to quickly stamp out inflation, such as aggressively raising interest rates and other contractionary measures. Inflation hawks believe that low target inflation rates, around 2% to 3%, should be maintained, even it comes at the expense of economic growth or employment. Those with the opposite policy stanꦗce are 𝓀known as doves.