Most central banks have a mandate that requires price stability (low inflation) and high employment. This dualism actually creates tension because actions that focus on one side can worsen the other, making the whole thing a balancing act. If a central bank expands its balance sheet – buying securities in exchange for liquidity – in an attempt to stimulate the economy and create jobs, the risk increases that inflation could become a serious problem. Even the “doves” know this, but they tend to think that temporary blips above the inflation target (which is usually around 2%) are acceptable. Let's clarify the distinction between hawks and doves and see how the most influential central bankers match up.
Hawk vs. Dove: What does it mean?
The terms “hawk” and “dove” are used as a slang to describe the attitude of a policy maker towards inflation. Hawks worry more about inflation, doves worry more about employment. Just like a hawk kills, then eats, so a monetary policy hawk would – if taken to an extreme – disregard the unemployed in favor of inflation control. In more common use in today’s marketplace, the definitions are even simpler than that. A hawk is simply seen as someone who is likely to want interest rate increases, while people refer to someone as a dove if he or she is more likely to want lower interest rates.
But currently it's not very helpful to think in terms of hawks and doves to understand why central bankers can disagree with each other. It may be more useful to understand the divergences in the theories each policymaker uses to guide his or her decisions (New Keynesian economics, Old Keynesian economics, and Old Monetarists are the main divisions). In the workings of monetary policy, views about the mechanism by which monetary policy works can be irrelevant. Everyone appears to accept that there is some short-run non-neutrality of money at work and also accepts that it’s important to keep inflation in check.
So if inflation targeting is consistent with central banks' mandates and keeps the doves and hawks in agreement, why is there so much discussion? The fact is that there is more to monetary policy than just the inflation target. The key differences are in views about the persistence of monetary non-neutrality and how to spot inefficiencies that the central bank is capable of correcting. If it’s true that central bank policies can be described by a simple Taylor Rule, which takes into account the output gap and inflation, then there is room for dualism. How much emphasis should be put on each of the two parts?
Taylor Rule: it = 2 + πt + a( πt – π*) + b(yt – yt*)
it is the prescribed value of the policy interest rate in a given period t;
πt – π* is the deviation of the actual inflation rate πt from it's target π* in period t;
yt – yt* is the “output gap”, the deviation of actual real output from the potential output in period t;
a and b are real positive numbers; they are the “weight” to put on each part of the Taylor Rule and can be viewed as the area that really distinguishes hawks from doves.
Policymakers have traditionally confronted this question starting from the ground and working upwards: What does the common citizen want for himself and his family? Basing policy decisions around the wants and needs of the citizens really seems superior to any other type of judgement on the economy. So the idea, within the Taylor rule, is to choose the weights a and b so that they maximize household utility over a long period of time. So, who is right, the hawks or the doves? There’s no definitive right answer. An entire country’s economic system is extraordinarily complex and the choice of most effective policy will have to fluctuate over time.
That’s not really important to us anyway. As traders, our focus on the hawks and doves should be towards the way reality lines up with expectations. If the market views a central bank as dovish, yet they release a policy statement and make comments that suggest a bias towards increasing interest rates sooner rather than later (a very hawkish move), expect to see some strong moves on that. If a central bank was already seen as hawkish and a member of that bank hits the newswires with comments on how interest rates need to be raised, nobody is going to blink. To give you the framework to understand what the market expects, we’ll finish this up with a brief overview on each central bank, its members, and their hawkish or dovish alignment.
Identifying Hawks and Doves
Federal Reserve (United States):
European Central Bank:
Bank of Canada:
Stephen Poloz, Governor of the BoC, is slightly dovish which is in stark contrast to the previous Governor Carney.
Bank of England:
Hawks and doves are well balanced.
Bank of Japan & Swiss National Bank:
Very little case for distinction between hawks and doves, though the BoJ is overall seen as very dovish.
To sum up: Hawks and doves are divided on their stances on inflation, employment rate, and consequently interest rates. The usefulness of knowing whether a certain policymaker is a hawk or dove lies in the capability of reading the market's response to certain phrases, considerations or speeches. Knowing what tendency a policy maker has can help you understand what he or she might say, thus any significant divergences from the "consensus view" become relevant and actionable ideas.
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