What is... | January 8, 2014

What is a hawk (or dove) in financial markets?

In just a few months, a central banker might switch from being known as a “hawk” to a being known as a “dove”, because of a stance on interest rates and monetary policy.

The terms hawk and dove – and the descriptions “hawkish” and “dovish” – are sometimes applied to other institutions and public figures. A dove in financial markets has characteristics of the bird – traditionally seen as peaceful and passive. Doves would therefore be seen as unlikely to take aggressive action. A hawk in financial markets, on the other hand, might be seen forceful and powerful – much more aggressive in attitude and stance.

But given being a hawk or a dove relates here to a position on monetary policy, it is entirely possible (and sometimes desirable) their stance will change along with the economy. In simple terms, to be dovish relates to a loosening of monetary policy, such as lowering interest rates. And to be hawkish relates to a tightening of monetary policy such as raising interest rates.

Birds of a feather 
The Dictionary of American History, according to an excerpt here, tells how use of the terms "hawk" and "dove" this way came into widespread use during the Vietnam War, but the roots are much older than that. It says the association of doves with peace is rooted in the Bible story of the Great Flood. On the other hand, "War Hawk" was applied to advocates of war in the United States as early as 1798 when Thomas Jefferson used it to describe Federalists who were ready to declare war on France. Only more recently have the terms been applied to monetary policy.

Former Federal Reserve chairman Alan Greenspan reversed his stance followed Black Monday in October 1987, when, as detailed by Reuters, share markets around the world tumbled. Greenspan was initially hawkish in the summer of 1987, but rapidly turned dovish regarding Federal policy that lasted into the 1990s. Likewise, his successor chairman of the Federal Reserve, Ben Bernanke, was called both a hawk and a dove.

An Economist article writes that past US presidents have felt it necessary to hire monetary-policy hawks like Volcker and Greenspan in a bid to reassure markets that the Federal Reserve would not give in to the political system’s inflationary bias. However, Janet Yellen the economist on track to be the next Federal Reserve chair is likely to become the first ever woman to run the Federal Reserve and is also the first acknowledged dove.

Learning from animals
Doves and hawks are not the only animals used to describe financial markets. Bulls and bears are also used. A “bull” market is typically one with rising prices and a “bear” market is typically one with falling prices. More animal terms include a butterfly spread which is a strategy used to sell call options whilst buying call options on the same security or futures contract.

Also, a bear raid is an illegal attempt to lower the market price of a security by heavy selling or short selling, carried out by large groups of traders – likened to an attempt by bears to acquire as much food as possible by rampaging and raiding. During the global financial crisis that began in 2008, there was a lot of talk of an unexpected event as a “black swan”, referring to Nassim Taleb’s book of the same name, and a boom in Ireland caused that country to be called a “Celtic tiger”.


eZonomics team
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