By Charis Mountis, Head of Dealing at ForexTime Limited
Central bankers are traditionally classified in one of two major groups according to their opinions on matters of inflation and unemployment: the hawks and the doves. It was once very clear what the positions of each side were, and where on the hawk-dove spectrum each central banker sat. In the last few years, however, and especially since the beginning of the most recent global financial crisis in 2009, it has become harder and harder to discern the real positions of bankers on matters of financial policy based on their classification as hawks or doves. We have seen hawks acting in dovish ways, heard doves making hawkish statements, and observed a new breed of bankers that firmly nest in the middle refusing to be pigeonholed into one specific group.
What is the reality of the ‘hawks vs. doves’ debate on the global central bank scene? And how useful is this terminology when discussing the views and actions of these policy makers? To answer these questions, we will first have to look into the origins of the terms to understand their real implications, and then consider whether their application offers any meaningful insights into the discussion on economy.
The Hawks vs. the Doves: as simple as Inflation vs. Unemployment?
Starting in the 1970s and up until Japan slipped into serious deflation in the 1990s, central bankers, and especially those of the US, were mainly struggling against climbing inflation rates and their potentially deleterious effects on employment. Bankers had two options for balancing the economy: to increase interest rates in order to keep inflation from rising above the globally acceptable level of two percent,or to let inflation rise provided that it brought growth and new employment opportunities. Bankers favouring the first solution were termed hawks: ever vigilant of prices and ready to swoop in and save the economic day. Bankers favouring the latter solution were named doves: placid and relaxed with an eye on keeping employment at a strong level.In terms of policy, hawks were seen as propagating rate hikes and opposing Quantitative Easing (QE), while doves were all for QE and never happier than when slashing interest rates.
How the New Economic Crisis has Changed the Landscape (and its birds)
The 21st century came in shaking the financial markets to their core and bringing with it new kinds of problems challenges for policy makers. Central bankers no longer had to contest against inflation alone (if at all);disinflation and the risk of deflation became the main threats against most developed economies.
When faced with deflation, a banker who is primarily concerned with keeping interest rates around the acceptable level of two percent (and thus traditionally labelled a hawk), will most likely propose the employment of financial tools that have historically been used by doves, such as QE. So what do we call this banker in this particular situation? A dovish hawk? Or do we perhaps call him a ‘deflation hawk’ as Paul Sheard of Standard and Poor suggests in his 2013 research paper.
In that same paper, Paul Sheard ultimately advocates the abandonment of the bird terminology altogether, arguing that it sheds little light on the real issues being discussed in the current economic climate. Given the continued popularity of the terms, however, not many people seem to have heeded his advice. But what can be observed is a shift in the use of the terms that could help bring a greater understanding of the real issues behind proposed policy changes.
Enriching the Debate with the Addition of‘-ish’
When the previous chairperson of the Federal Reserve, Ben Bernanke, who is traditionally seen as a hawk, advocated QE, he was called a dovish hawk. His successor, Janet Yellen, a known dove, has not only tapered QE, but is also expected to approve an interest-rate hike later this year, which makes her seem a rather hawkish dove. Across the pond, the president of the European Central Bank, Mario Draghi has had to walk a very fine line to steady the turmoil that has been sweeping Europe the last few years, and has been variously termed as both a hawkish dove and a dovish hawk.
But instead of confusing doves with hawks, perhaps all that is necessary in each case is that we drop the nouns and stick to the adjectives ‘hawkish’ and ‘dovish’ accordingly.It is not the use of QE, or the raising of interest rates, or the employment of any other financial tool that makes a hawk or a dove, but rather the reasons for proposing the use (or restriction) of the tool. Discussing the opinions and specific arguments of the various bankers as ‘hawkish’ and ‘dovish’, rather than specifically and definitively identifying the central banker as a hawk or a dove, opens our perspective to the underlying issues at hand and the specific solutions proposed by each banker.
Central bankers are not one-track minds with views that center only on inflation or employment. They rather try to balance the tensions between the opposing mandates of regulating both inflation rates (while preventing deflation) and employment levels. The tools they choose to strike this balance may traditionally be hawkish or dovish, but their choice of instrument depends more on how they think a problem can be best solved, rather than on an absolute and inflexible belief about which set of tools is the best. Although there may no longer be any ‘real’ doves or hawks, since inflation has stopped being the primary concern of central banks, the terms ‘hawkish’ and ‘dovish’ still provide a convenient shorthand in discussing central bank policies, and in that capacity still offer valuable information on what is being proposed.
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