Client Question: What do birds have to do with the Federal Reserve?

June 15, 2023

I’d imagine whatever professional field you are in, you have a certain vernacular that has become second nature to you. So much so that you don’t even realize when you’re using terms that those outside your profession may not immediately understand. This is certainly true for me and the terminology that accompanies a career in investing.

I was reminded of this fact earlier this week when a client asked me what I meant by “hawkish” and “dovish” – terms I was freely using when discussing the actions of the Federal Reserve. Certainly a great question and one I thought a few of you may have!

It’s believed that the terms hawk/hawkish and dove/dovish were originally used in a militaristic sense (ie: hawk as someone who wanted to use force, dove as someone who favored diplomacy). These terms are now commonly used to describe the actions and general leanings of members of the Federal Reserve Open Market Committee (FOMC).

An FOMC member is described as a hawk (or deemed to have taken hawkish action) when they favor more restrictive/tighter monetary policy. Their favored actions would include rate hikes or quantitative tightening (ie: selling government securities to remove liquidity from the system). The main goal of a hawk is to keep inflation under control and not allow economic growth to become too accelerated (which can risk inflation rising above a desired level).

On the other hand, FOMC members who are considered more pro-growth and favor looser monetary policy to stimulate economic activity (even if it creates a certain level of inflation) are called doves (or deemed to have taken dovish action). Cutting interest rates or engaging in quantitative easing (ie: buying government securities and thereby placing added liquidity into the system) would be actions a dove may favor.

Let’s look at these terms in action! This week, after the June 2023 Federal Reserve meeting, the consensus was that it was a “hawkish pause.” What did the press mean by that? While the Federal Reserve opted to keep rates where they are this month, many viewed the surrounding commentary (ie: documentation that future rate hikes are on the horizon, a mention of the word “skip”, meaning that more rate hikes are coming, etc) as being indicative of further rate increases, the overall theme of the month was viewed as restrictive, or hawkish. Hence a hawkish pause.

Contrast this to May’s Federal Reserve meeting, where many called the actions taken a dovish raise. At that meeting, Fed officials opted to increase rates by 0.25%. Taken in isolation that raise could have been viewed as hawkish. However, since Fed Chair Powell cushioned the increase with commentary saying the Federal Reserve would closely monitor data moving forward and evaluate each rate decision, the markets viewed it as overall favoring growth/easy monetary policy. Hence a dovish raise.

There you have it – a quick guide to what birds have to do with the Federal Reserve and monetary policy. One last aside (for fun) – what nickname do Fed members who fall in between hawks and doves receive? Pigeon!

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