Hawkish vs. Dovish: Definitions, Examples & What They Mean for Investors – TheStreet

If the Fed is hawkish, it has inflation in its sightlines.
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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 reduce rising prices, maintain healthy levels of employment, and thus avoid recession.
When a hawk has something in its sightline, it appears to focus solely on its prey; to extend the metaphor, some pundits believe when the Fed lasers in on fighting inflation, it may miss the consequences its actions have on the broader economy, such as slowing the housing market or GDP growth.
Hawkish monetary policy, also known as tight 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:
Why would the Fed need to tighten liquidity? One example of hawkish monetary policy happened in 1980, when the Fed Funds rate hit an astounding 20%. Federal Reserve Chair Paul Volcker took a tough stance to combat the sky-high inflation, known as stagflation, which had stemmed from an oil embargo in the 1970s.
This embargo caused oil prices to rise from $3 to $12 a barrel and had other negative economic outcomes, including increased food and transportation costs, and higher union wages. The only path out of a years-long recession was through high interest rates.
Dovish (or accommodative) policy, is the opposite of hawkish and favors expansionary monetary policy to achieve maximum levels of employment. The Fed does this by lowering the Fed Funds rate. This has a ripple effect on the economy, making it easier for homebuyers to obtain a mortgage, consumers to purchase things on credit, and businesses to obtain loans to hire more workers or increase production, etc.
The Fed walks a fine line when it makes changes to the Fed Funds rate; when interest rates are too high, economic growth contracts, payrolls shrink, and unemployment rises. On the other hand, if interest rates are too low, shortages can occur, and inflation can increase. The mandate of the Federal Reserve is to maintain a healthy economy through stable prices and maximum employment, and to do so, it must set interest rates at the right level at the right time.
Dovish monetary policy favors an “easy money” environment, when the Fed Funds rate is cut, which makes it easier for businesses and consumers to obtain loans. Quantitative easing is practiced in dovish times. Consumers spend more, and the economy expands.
After the 2007–2008 Financial Crisis, which stemmed from the implosion of U.S. mortgage-backed securities and had an impact on global markets, the Fed slashed interest rates from 4.5% at the end of 2007 to between 0.0% to 0.25% at the end of 2008. And between 2008 and 2014, the Fed also began a series of trillions of dollars worth of quantitative easing measures to increase financial liquidity and encourage lending. During this period, the United States entered a decade-long bull market.
The Fed can be hawkish and dovish; it all depends on where we are in the economic cycle. Dovish Fed Chairs tend to allow higher levels of inflation than hawkish Fed chairs.
As the Fed tightens monetary policy, market volatility often increases. This phenomenon is known as a taper tantrum—and sometimes it takes another round of quantitative easing for the markets to settle down.
It’s always important for an investor to have a solid foundation of portfolio diversification, but it’s especially so through periods of hawkish monetary policies. Value stocks, bonds, and securities that are tied to inflation—like I bonds and TIPS—tend to outperform.
Assets that generally do well in low-interest-rate environments thrive during periods of dovish monetary policies. These may include growth stocks and blue-chip stocks. As always, investors should do their homework and check out the fundamentals behind a company before they invest in it. After all, a well-informed investor is a profitable investor.
While the Fed turned decidedly hawkish in 2022, TheStreet’s James “Rev Shark” Deporre sheds light on several investment themes that are dominating the markets in 2022, and why they shouldn’t drive you crazy


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