Dove (Monetary Policy) – Definition

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Dove (Monetary Policy) Definition

Dove refers to an economic policy adviser who advocates for monetary policies involving low-interest rates. The doves argue that inflation isn’t bad and that it is bound to have few negative effects on the economy. They also believe that monetary policies that keep low-interest rates have a positive effect on the overall economy of a nation.

A Little More on What is a Dove

The term dove is common in the United States where it is used to describe nominees and members of the Federal Reserve Board of Governors. These are individuals who have more influence on the United States’ monetary policies.

Doves support the idea of low-interest rates since they believe that it encourages economic growth. They also argue that an increase in economic growth leads to a high rate of borrowing among the consumers, which encourages spending. Therefore, doves believe that low-interest rates have few negative effects.

Examples of Dove

Doves in the United States refer to Federal Reserve members who have the responsibility of setting interest rates. The term may also refer to politicians or economists who advocate for the same.

A good example of a dove is Ben Bernanke and Janet Yellen. The two are referred to as doves because of their commitment to supporting the low-interest rates. Another example of a dove is an economist by the name Paul Krugman, who is known to advocate for the same thing too.

Doves versus Hawks

While the doves don’t see low-interest rates as a cause for an alarm, they do agree that maintaining low rates may increase inflation. Hawk is the opposite of dove. Hawks are those individuals who believe that higher interest rates reduce inflation. The doves favor expansionary monetary policies, while hawks support tight monetary policies.

Unlike doves who favor quantitative easing, hawks are generally against it. They feel that it is a way of distorting asset markets. In addition, they always project an increase in future inflation. Hawks see the possibility of inflation increasing risks in the overall economy. So, this is the reason why they see the need to tighten monetary policies.

Note that some individuals happen to switch between dove and hawk based on the prevailing situation. For instance, Alan Greespan was known to be “hawkish” between 1987 and 2006 when he was serving as the chairman of the Federal Reserve. However, his outlook on the Fed’s policies made him become “dovish” in the 1990s.

In fact, the United States people, as well as investors, prefer a Federal Reserve chairperson who is capable of managing the two positions. In other words, an individual who can switch between the two positions whenever the situation demands.

Dovish and Hawkish Language

“Dovish” language may be used to describe statements. Dovish statements are those statements that suggest that inflation’s effects are insignificant. For instance, the Federal Reserve Bank may use dovish language to describe inflation. When such tone is used, it means that the effects are negligible and there is unlikelihood of the bank taking aggressive measures.

The opposite of “dovish” is “hawkish.” When hawkish language is used to describe statements related to inflation, the possibility that the bank will take aggressive measures is high.

How Interest Rates are Determined

Each year the Federal Open Market Committee meets eight times to discuss interest rates. The group uses key indicators to determine the rates. These rates are the ones the regional Federal Reserve Banks uses to set what they charge their clients. The interest rates also apply to other depository institutions that give loans.

Note that the rates set by the Fed’s group do not necessarily dictate the interest rate the banks are supposed to charge their clients. However, the rates greatly influence the interest rates each bank sets.

For instance, let’s assume that a regional Federal Bank pays a rate of 2% to borrow from the Federal Reserve Bank. In this case, the bank will offer low-interest rates to its clients. However, if the same bank pays 20% to borrow money, then it will have to increase its borrowing rates. The reason is that the bank usually passes over the high-interest rates to its borrowers increasing the clients’ rates of borrowing.

How Low-Interest Rates Encourage Consumer Spending

When the interest rates are low, it means that most people can access money. Low-interest rates also encourage consumers to take things such as car loans, mortgages, and credit cards. In general, low rates increase consumer spending powers. And, the whole process usually has a positive effect on the overall economy.

How Low-Interest Rates Cause Inflation Rise

Due to a high rate of consumption, there is the creation of job opportunities. Note that an increase in the consumption rate is because of the low-interest rates that enable people to borrow money. People are able to shop, build new houses, and manufacture more products. The whole process increases demand leading to the overall increase in the price of commodities and services.

Also, when there is a high rate of employment, it means that many people are earning high wages. With this, people can afford services and products despite their high prices. When this happens, it creates a cycle of wage and price increase, leading to inflation.

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