What Does Hawkish Mean in Finance?

 In finance, "hawkish" refers to a monetary policy stance that favors higher interest rates to combat inflation. When a central bank, like the Federal Reserve, adopts a hawkish approach, it aims to tighten financial conditions by reducing the money supply, making borrowing more expensive, and ultimately slowing down economic activity. This is done to prevent rising inflation, even if it comes at the cost of slower growth or higher unemployment.

What is Hawkish Monetary Policy?

Hawkish monetary policy is characterized by actions such as raising the Fed Funds rate, which affects the interest rates that banks charge each other and, in turn, the rates consumers and businesses face. Another tool is quantitative tightening, where the Fed reduces its holdings of government bonds and mortgage-backed securities, further limiting liquidity.

Example of Hawkish Monetary Policy

A prominent example of hawkish policy occurred in the early 1980s under Federal Reserve Chair Paul Volcker. To fight inflation that reached double digits due to the oil embargo in the 1970s, the Fed raised interest rates to 20%. This helped curb inflation but also caused a significant recession.

Hawkish vs. Dovish

The opposite of hawkish is "dovish," which refers to expansionary policies aimed at promoting economic growth, often by lowering interest rates. This makes borrowing cheaper, encouraging businesses to invest and consumers to spend, boosting the economy. However, dovish policies can sometimes lead to inflation if the economy overheats.

Current Economic Environment

As of 2023, the Federal Reserve has been pursuing a hawkish stance, aggressively raising rates in 2022 to curb inflation. However, there has been a shift towards what some call a "hawkish pause," where the Fed holds rates steady to assess the impact of previous hikes.

In a hawkish environment, investments like value stocks, bonds, and inflation-protected securities tend to perform well, while in a dovish setting, growth stocks and blue-chip stocks typically benefit from lower interest rates.