Updated Mar 24, 2022

What is Dovish Vs? Hawkish in Monetary Policy?

What is Dovish Vs? Hawkish in Monetary Policy?

Introduction

When it comes to monetary policy, there are many financial institutions responsible for maintaining inflation rates and ensuring financial stability. One of these organisations is known as the Central Bank.  When needed, central banks can interfere with financial markets and coordinate with other institutions to ensure that the Monetary Policy Framework is being followed.

The Central bank acts as a lender to the government if they need funds to support the Gross Domestic Profit or ensure that any debt is paid off. If the debt to GDP ratio is very high, and fundraising efforts don’t work, then the government can ask the central bank for a loan through bond auctions to meet the liquidity ratio.

What Does a Hawkish Monetary Policy Mean?

A hawkish monetary policy refers to the contractionary moves taken by the central banks when it comes to lending money to the government. This can be done by increasing interest rates or reducing the central bank’s balance sheet. A hawkish monetary policy can mean that the central bank is positive about economic growth and inflation rates. Hawkish monetary policies can include:

1. Increasing interest rates
2. Currency appreciation
3. Reducing the Federal Reserve balance sheet
4. Increase in inflation prices

What Does a Dovish Monetary Policy Mean?

The term dovish is the opposite of what a hawkish monetary policy is. This happens when the central bank is quite pessimistic about the economic situation and lowers interest and lending rates to the government to help it improve the country’s GDP. When there is a looming inflation, then the monetary policies turn dovish where lending is much easier for the central government. Some dovish policies may include;

1. Decreasing interest rates
2. Currency depreciation
3. Increasing the Federal Reserve balance sheet
4. Decrease in inflation prices

What is the Federal Bank’s Reserve System?

The Federal Reserve system originated in the United States and has been adapted by many countries worldwide. The general objective of the system is to oversee monetary policies and ensure that there is stable economic growth that ultimately serves public interest. To meet these objectives, the federal system can take steps like:

1. Promote employment, stable pricing without inflation and provision of low interest rates.
2. Reduction of risk wherever possible to ensure the financial system is stable.
3. Development of safety within financial institutions.
4. Champion safety within payment systems.
5. Advocation of consumer protection through maintaining a supervisory stance.

How Do You Trade with a Hawkish Vs. Dovish Central Bank?

The slight shift from a central bank can mean drastic changes for currencies in the nation. This means that the central bank has to monitor the federal reserve system to look for changes that might indicate these issues. Trading within a hawkish or central banking system is more than just buying and selling currencies. It also has to do with changing interest rate expectations from the government and public.

One possible way of trading with these monetary policies is by assuming that the interest rates are already hiked. It is then the job of the trader to look for clues and signs that could possibly shift the tone of the central bank from hawkish to dovish or vice versa.

Conclusion

When it comes to hawkish monetary policy, this means that the central bank has put a clasp on reserves and wants to hike interest rates in the hope of economic growth. If the market is dovish, then interest rates are lower, and the central bank tends to lend the government money easily, to help them give the economy a push so that it can grow.

A dovish policy does not mean that the economy is deflating, but it could just be a sign, and it is up to the trader to ensure that these policies are followed to the tee. In a hawkish monetary trading policy, it is up to the bank to monitor changes and look for signs in the economy and forecast its growth. Sometimes, changing from a dovish to a hawkish policy, and vice versa can be difficult because it depends on how much reserve the federal system has to spare.

It is much better to have a hawkish policy because this can mean positive things for the country in terms of longer economic stabilisation and more fund reserves in the case of an economic crash. This is why many traders tend to change their monetary policies regularly and keep an eye on the market.